Entering 2011, the Securities and Exchange Commission had expected to decide whether, and if so, how and when, to incorporate International Financial Reporting Standards into financial reporting by domestic issuers. The SEC staff made substantial progress toward completing the Work Plan it had developed in 2010 to support the Commission’s decision, publishing papers that assessed the development and application of IFRS. The staff also published and obtained comments on a potential framework (colloquially referred to as “condorsement”) for incorporating IFRS into the U.S. financial reporting system. However, the staff will need a few additional months to produce its final report, and while the staff is in the process of developing an approach for Commission consideration, it is still too early to determine a precise schedule for making a decision.

As expected, during 2011 the SEC devoted much of its attention to completing rulemaking required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), focusing on:

Enhancing corporate governance;
Upgrading the regulation of credit rating agencies and asset-backed securities;
Regulating hedge funds, other private fund advisers and the over-the-counter derivatives markets; and
Other activities required by the Dodd-Frank Act, such as working with other federal agencies to enhance regulation of financial institutions.

More than 90 provisions in the Dodd-Frank Act require SEC rulemaking. Although the Commission has not met several statutory deadlines, it has made significant progress toward completing those tasks. The SEC has proposed or adopted over three-fourths of the rules that are required. It has also finalized 12 of the more than 20 studies that the Act directed it to complete.

In January, the SEC adopted say-on-pay, say-on-frequency, and say-on-golden parachute rules that require shareholder advisory votes. In March, the Commission proposed rules that would require the national stock exchanges and associations to establish listing standards requiring compensation committee members to be independent. These rules would also require registrants to evaluate compensation consultant conflicts of interest. In May, the SEC finalized whistleblower rules, and when the rules became effective in August, it opened the Office of the Whistleblower. In July, the SEC adopted rules that change the eligibility criteria for issuers to use short forms (Forms S-3 and F-3) to register offerings of non-convertible securities such as debt securities. The SEC removed credit ratings from the criteria and replaced them with alternative criteria, primarily based on the size of previous registered debt offerings or registered debt outstanding. In December, the SEC amended the accredited investor standard to exclude the value of a person’s home and also finalized mine safety disclosure requirements.

The Commission missed the Act’s deadlines for several rulemakings, but plans to adopt rules covering conflict minerals, resource extraction issuer payments to governments, and many other topics in 2012. The SEC also plans to adopt rules in 2012 regarding pay-for-performance and pay ratio disclosures, compensation clawback policies, and director and employee hedging policies; the Act did not set deadlines for adopting these rules.

In 2010, the Commission adopted a rule to facilitate the rights of shareholders to nominate directors to a company’s board (also known as proxy access). The process the SEC used to adopt this rule was challenged, and in July 2011, the U.S. Court of Appeals vacated this rule. The SEC did not appeal the court’s decision, and other rules that were finalized with the proxy access rules became effective in September. These other rules provide a two-step path to proxy access, allowing shareholders to first adopt by-law changes that allow them to include their nominees in a company’s proxy materials and then to include their nominees in the succeeding year, a slower more cumbersome process for shareholder director nomination than that provided by the vacated proxy access rule.

During 2011, the SEC suspended or halted trading in a number of companies that had previously been involved in reverse mergers due to questions regarding the accuracy and completeness of information included in their public filings. In November, the SEC approved national stock exchange rules that tighten listing requirements for reverse merger companies by requiring a one-year seasoning period and a minimum share price.

XBRL interactive data submissions began for a portion of the third phase-in group, and the temporary partial relief from liability with respect to interactive data files began to expire for issuers in the first phase-in group. During the year, the staff reviewed XBRL submissions and published its observations and updated its FAQs.

The staff also updated its guidance on complying with various other Commission rules and regulations. The staff provided updates to its Compliance and Disclosure Interpretations (C&DIs) covering other topics and its Financial Reporting Manual (FRM[1]) three times during the year. The staff added a new type of guidance to replace its “Dear CFO” letter series, called “CF Disclosure Guidance,” and issued guidance on three topics. The staff also issued small business compliance guides covering two new areas – facilitating shareholder director nominations and shareholder approval of executive compensation and golden parachute compensation.

The staff also launched an initiative to engage registrants, auditors, users and regulators on important accounting and reporting issues, with the goal of addressing them before they become significant problems. The initiative is called the “Financial Reporting Series.” In November, the series began with a roundtable entitled, “Uncertainty in Financial Reporting: How Much to Recognize and How Best to Communicate It.”

Both the SEC and the PCAOB experienced leadership changes. At the SEC, Commissioner Kathleen Casey completed her term and left the agency in August. Daniel Gallagher replaced her in November. Commissioner Luis Aguilar was confirmed and began a second term as a Commissioner. On the staff, Wayne Carnall resigned as Chief Accountant in the Division of Corporation Finance in June and his replacement has not yet been named. At the PCAOB, James Doty was appointed Chairman, and Jay Hanson and Lewis Ferguson became Board members.

Looking forward to 2012, rulemaking to implement the Dodd-Frank Act can be expected to continue to dominate the Commission’s agenda. The Commission will also continue to work toward a decision on incorporating IFRS into the U.S. financial reporting system. The SEC may proceed with finalizing rules it proposed in 2010 requiring registrants to disclose information about short-term funding needs and how they’re financed, and it plans to resume work in 2012 on its “proxy plumbing” project to modernize the procedural aspects of shareholder voting.

In 2012 the Commission also plans to take a fresh look at some of its offering rules and consider changes that would reduce the regulatory burdens on small business capital formation. To facilitate this, the SEC formed an Advisory Committee on Small and Emerging Companies that will provide advice and recommendations to the Commission regarding capital formation by small businesses and small publicly traded companies. The Commission has also asked the staff to develop ideas for the Commission to consider, and the staff is focusing on a number of areas, including:

The number of shareholders and other triggers for public reporting;
The restriction on general solicitation in private offerings;
Restrictions on communications in public offerings;
Regulatory questions posed by new capital raising strategies, such as crowdfunding; and
The scope of existing rules that provide for capital raising, such as Regulation A.

This publication summarizes many of the 2011 Commission and staff activities described above. We discuss rulemaking initiatives finalized in 2011 first, followed by those still in process as of December 31, 2011. We then discuss guidance the staff provided during 2011. Although not the focus of this letter, we also briefly discuss the 2011 standards setting and related activities of the Public Company Accounting Oversight Board.

New Commission Rules

Implementing the Dodd-Frank Act

Say-On-Pay

(Release 33-9178)

In January, the SEC adopted rules mandated by Section 951 of the Dodd-Frank Act that require the following non-binding shareholder advisory votes:

Say-on-Pay – Shareholders vote on whether they approve of executive compensation programs;
Say-on-Frequency – Shareholders vote, at least once every six years, on the desired frequency of the say-on-pay vote (i.e., whether it’s held every year, every other year, or once every three years); and
Golden Parachute Arrangements – Shareholders vote on whether they approve of golden parachute executive compensation to be paid in connection with a merger, going private, or tender offer transaction.

The say-on-pay and say-on-frequency advisory votes were required beginning with the first annual or other meeting of shareholders at which directors were elected occurring on or after January 21, 2011. A golden parachute arrangement shareholder advisory vote can be taken either at an annual meeting or at the meeting at which shareholders are asked to approve the related merger or acquisition transaction. The golden parachute advisory vote requirements became required in proxy statements initially filed on or after April 25, 2011.

The Commission temporarily exempted smaller reporting companies from the say-on-pay and say-on-frequency votes until annual meetings occurring on or after January 21, 2013. Unlike the say-on-pay votes, smaller reporting companies did not receive a temporary exemption from and are required to implement the golden parachute votes at the same time as all other registrants. Foreign private issuers are not subject to the SEC’s proxy rules and therefore are not be subject to these new requirements.

The SEC had proposed these rules in October 2010, and they were finalized largely as proposed. In addition to the requirements discussed above, the rules require public companies subject to the Commission’s proxy rules to:

Disclose the outcome of the say-on-pay and say-on-frequency votes in an Item 5.07 Form 8-K filing no later than four business days following the shareholders meeting. In that Form 8-K, a registrant must also disclose, if it has decided, how frequently the registrant will hold say-on-pay votes. If it has not decided, it must amend the initial Form 8-K to disclose how frequently it will hold say-on-pay votes. The amendment is required within 150 days of the annual meeting in which the vote took place; however, this date must be no later than 60 calendar days prior to the deadline for shareholders to submit proposals for the subsequent annual meeting.

Disclose in the Compensation Discussion and Analysis whether, and if so, how, the registrant has considered the results of previous say-on-pay votes.[2]

MFA Observations

Through June 2011, shareholders approved pay programs in 2,463 out of 2,502 companies, representing a 98.4 percent approval rating.[3] A Towers Watson study on the first say-on-pay proxy season found that 79 percent of the companies it surveyed said that the vote had either no or only a little to moderate impact on the actions they took to prepare for the 2011 proxy season. It also noted that say-on-pay is expected to have a bigger impact on those companies that received less than 80 percent support for their pay programs or negative vote recommendations from proxy advisers. Over two-thirds of these companies said that they plan to devote more time to executive compensation this year and to take actions such as considering changes to core and other compensation programs.[4]

Also, shareholders seem to prefer annual say-on-pay votes. As of June 23, 2011, shareholders had voted for the annual option in approximately 81 percent of Russell 3000 reporting companies. The other options, biennial and triennial, received 1 and 18 percent of the vote, respectively.[5]

The release is available on the SEC’s website at: http://www.sec.gov/rules/final/2011/33-9178.pdf.

Security Ratings

(Release 33-9245)

In July, the SEC adopted rules that change the transaction criteria that are used to determine whether an issuer is eligible to use short forms (Forms S-3 and F-3) to register offerings of non-convertible securities such as debt securities. Registering primary offerings using these forms is desirable because (a) company information can be incorporated by reference and (b) after the registration statement is effective, the securities can be taken “off the shelf” and offered at a later date. The changes were made to implement Section 939A of the Dodd-Frank Act, which required the SEC to eliminate form and rule requirements based on security ratings. One instruction to these forms requires an issuer to meet a $75 million public equity float test in order to be eligible to use these forms to register a primary offering. Previously, these forms permitted an issuer that does not meet this test (e.g., an issuer that had previously conducted only registered debt offerings) to nevertheless be eligible to use them if the securities offered were non-convertible investment grade securities. The SEC replaced the investment-grade credit-rating criterion with the requirement that the issuer:

Has issued at least $1 billion of non-convertible securities in registered primary offerings for cash (not exchange) over the prior three years;
Has outstanding at least $750 million of non-convertible securities that were issued in registered primary offerings for cash (not exchange);
Is a wholly-owned subsidiary of a well-known seasoned issuer;
Is a majority-owned operating partnership of a real estate investment trust (REIT) that qualifies as a well-known seasoned issuer; or
Discloses its reasonable belief that it would have qualified under old rules, discloses the basis for such belief, and files the prospectus for such offering on or before September 2, 2014.[6]

The intent of these criteria was to preserve the use of short forms by registrants that are widely followed in the market. The rules changes generally became effective September 2, 2011.

Conforming changes were also made to Forms S-4 and F-4, Schedule 14A, and other rules and forms that refer to the investment grade criterion of Form S-3 or F-3. Forms S-4 and F-4 are used to register securities in connection with business combinations or exchange offers.

MFA Observations

As a result of these changes, the SEC expects that some issuers of high yield securities who are widely followed in the marketplace but were not previously eligible to use Form S-3 to become eligible to use short form registration and the shelf offering process.

An approach that is commonly used to sell debt securities to institutional investors is to sell the securities in an unregistered offering and then conduct a registered exchange offer in which identical new securities are exchanged for the previously issued securities. However, securities issued in exchange transactions don’t “count” toward meeting the new Form S-3 eligibility criteria. It will be interesting to see whether the change in the criteria promotes greater use of registered offerings for cash instead of the private sale/exchange offer approach.

The release is available on the SEC’s website at: http://www.sec.gov/rules/final/2011/33-9245.pdf.

Whistleblower Program

(Release 34-64545)

In May, the Commission voted 3-to-2 to adopt whistleblower rules mandated by Section 922 of the Dodd-Frank Act. The rules implement the Act’s requirement that the Commission pay an award to a whistleblower who voluntarily provides original information to the SEC that leads to a successful enforcement action with sanctions of over $1 million. Whistleblowers are eligible to receive between 10 and 30 percent of the sanctions the SEC collects for such actions.

The rules became effective August 12, 2011 and on that date the SEC’s Office of the Whistleblower became operational. The SEC defined the goal of the program as “to encourage the submission of high-quality information to facilitate the effectiveness and efficiency of the Commission’s enforcement program.”

The whistleblower rules that were proposed in November 2010 generated controversy, as reflected in the over 240 individual comment letters and 1,300 form comment letters received by the SEC. The aspect of the rules that was the subject of the most heated response, and the primary reason for the two “no” commissioner votes, was the possibility that the SEC’s program could undercut existing corporate internal compliance programs by incentivizing whistleblowers to report tips directly to the SEC. Chairman Mary Schapiro observed that the final rules were drafted to balance encouraging whistleblowers to report internally when appropriate while preserving the option of reporting directly to the SEC.

MFA Observations

We expect that most companies would prefer that whistleblowers report matters using their internal reporting systems, rather than reporting them directly to the SEC, because this would help the company to learn about and address the issue more quickly and potentially enable it to better manage the investigation at a lower cost. We also expect the volume of tips from whistleblowers to increase. Therefore, we suggest that companies consider steps to encourage internal reporting, make sure that internal reporting mechanisms are functioning effectively, and ensure that timely appropriate action is taken when tips are submitted.

In the final rules, the Commission modified the proposed rules to take the more “balanced” approach articulated by Chairman Schapiro. A summary of the final rules follows:

Role of Internal Compliance Programs: The final rules provide incentives for whistleblowers to report internally by:

Providing 120 days for the whistleblower to contact the SEC (increased from 90 days in the proposal) to allow companies adequate time to conduct internal investigations.
Increasing or decreasing the award depending on how much a whistleblower has participated in or interfered with the company’s internal compliance process.
Crediting the whistleblower when the company passes the information provided by the whistleblower along to the SEC, even if the whistleblower does not submit the tip directly to the Commission. If the company’s reporting leads to a successful SEC action, such a whistleblower is eligible for an award.

Whistleblower Protections: The final rules provide protection to whistleblowers who provide information to the SEC on both substantiated and possible securities law violations. The protection does not depend on the success of the related enforcement action.

Categories of Persons Eligible for Awards: The final rules loosened the limitations on persons eligible for awards outlined in the proposal by:

Defining three categories of corporate persons who are prohibited from providing whistleblower information:
- Officers, directors, trustees, or partners of an entity;
- Employees whose principal duties involve compliance or internal audit responsibilities, as well as employees of outside firms that are retained to perform compliance or internal audit work for an entity; and
- Employees of, or other persons associated with, a public accounting firm through an audit or other engagement required under the federal securities laws.
- Allowing attorneys (both in-house and outside) who have obtained information other than through privileged attorney-client communications to provide whistleblower information to the SEC.
- Allowing the corporate persons defined in 1 above to make whistleblower claims in certain circumstances, primarily involving a belief that the company is about to engage in conduct that is likely to cause substantial injury to the financial interest of the company or investors.

Simple Procedure: The final rules use a single Form TCR, available on the whistleblower portion of the SEC website, for submissions.

The two commissioners who opposed adopting these rules both questioned the ability of the Office of the Whistleblower to handle the increased whistleblower complaints that will likely result from the new rules. The SEC staff responded that it believes it has an effective process in place to handle the whistleblower tips and that it will continue to monitor and report on the process.

The release is available on the SEC’s website at: http://www.sec.gov/rules/final/2011/34-64545.pdf.

The Office of the Whistleblower website can be found at: http://www.sec.gov/whistleblower.

Mine Safety Disclosure

(Release 33-9286)

To codify the requirements of Section 1503 of the Dodd-Frank Act, in December the Commission adopted rules requiring registrants that operate coal or other mines (or that have a subsidiary that operates such a mine) to disclose specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities in their periodic and current reports. The rules apply to issuers that operate a mine in the U.S., including smaller reporting company and foreign private issuers.

SEC rulemaking was not required to implement the mine health and safety disclosure requirements. These disclosures have been required since August 20, 2010. The SEC noted that it issued the mine safety disclosure rules to “facilitate consistent compliance” with the Dodd-Frank Act requirements. The amendments are effective January 27, 2012.

In the adopting release, the SEC emphasized that “in the event that mine safety matters raise concerns that should be addressed in other parts of a periodic report, such as risk factors, the business description, legal proceedings or management’s discussion and analysis, inclusion of this new disclosure would not obviate the need to discuss mine safety matters in accordance with other rules as appropriate.”

The release is available on the SEC’s website at: http://www.sec.gov/rules/final/2011/33-9286.pdf.

Net Worth Standard for Accredited Investors

(Release 33-9287)

The accredited investor standard, which is set forth in Rules 215 and 501 under the Securities Act, is used in determining whether certain exemptions from Securities Act registration are available for private and other limited offerings. One of the criteria used to determine whether a potential investor is an accredited investor is the person’s net worth. As required by Section 413(a) of the Dodd-Frank Act, the Commission adopted amendments to the accredited investor standard to exclude the value of a person’s home and, with some exceptions, indebtedness secured by a person’s home. The change to the net worth standard was effective upon enactment of the Act, but the SEC was also required to revise Securities Act rules to conform to the new standard. Accordingly, the Commission made technical amendments to Form D and a number of other rules. The amendments are effective February 27, 2012.

The release is available on the SEC’s website at: http://www.sec.gov/rules/final/2011/33-9287.pdf.

Shareholder Director Nominations

(Release 33-9259)

In July, the U.S. Court of Appeals vacated the proxy access rule (Rule 14a-11) the SEC had adopted in 2010 to facilitate the rights of shareholders to nominate directors to a company’s board, and subsequently the SEC confirmed that it would not appeal the court’s decision. The SEC had placed a stay on all the rules it had finalized with Rule 14a-11 while the court was reaching its decision. In September, the SEC issued Release 33-9259, notifying registrants that the amendments to Rule 14a-8 and the other rules finalized with Rule 14a-11 would become effective September 20, 2011.

The amendments to Rule 14a-8 facilitate shareholders’ ability to adopt by-law changes that allow them to include their nominees in a company’s proxy materials. Rule 14a-8 is different than Rule 14a-11 because it provides proxy access to shareholders only at companies whose shareholders adopt by-law changes. Rule 14a-11 would have provided proxy access to shareholders at all companies without such by-law changes. Rule 14a-8 as amended requires companies to include in proxy materials shareholder proposals that would amend a company’s by-laws governing proxy access if the proposals do not conflict with SEC proxy rules, state law, or federal law. Shareholders must own at least $2,000 in market value, or 1 percent, whichever is less, of the company’s shares for at least one year to be eligible to make a proposal to change company by-laws. If the proposal is approved, shareholders would have access to the director ballot in the following year.

MFA Observations

It is too early to predict the effect amended Rule 14a-8 will have on the 2012 or subsequent proxy seasons. The Court invalidated the SEC’s proxy access rule on the basis of inadequate analysis of its expected costs and benefits, so the SEC can be expected to take steps to ensure that future analyses are sufficiently robust to prevent similar challenges.

The notice of effective date is available on the SEC’s website at: http://www.sec.gov/rules/final/2011/33-9259.pdf.

The adopting release for the amendments to Rule 14a-8 is available on the SEC’s website at:
http://www.sec.gov/rules/final/2010/33-9136.pdf.

Reverse Mergers

During 2011, the SEC suspended or halted trading in a number of companies that had previously been involved in reverse mergers due to questions regarding the accuracy and completeness of information included in their public filings. In addition to trading suspensions, the SEC also revoked the securities registration of several such companies because they failed to file required periodic reports.

The typical reverse merger transactions the SEC has been concerned about are ones in which an existing public company that is a shell with few or no operations acquires a private operating company—usually one that is seeking access to funding in the U.S. capital markets. Legally, the public shell issues stock for the stock or assets of the private operating company. Typically the former stockholders of the private operating company own a controlling interest in the public company after the transaction. The assets and business operations of the post-merger company are primarily, if not solely, those of the former private operating company.

A reverse merger often is perceived to be a quicker and cheaper method of going public than an IPO. While the public shell company is required to report the reverse merger in a Form 8-K filing with the SEC, unlike an IPO, the SEC staff does not have the ability to review the disclosure before the transaction has occurred.

In November, the SEC approved changes to the listing standards of The NASDAQ Stock Market LLC (Nasdaq), the New York Stock Exchange (NYSE), and the NYSE Amex LLC (NYSE Amex) that address the concerns discussed above. The changes are generally consistent among the three exchanges, and require reverse merger companies to do the following before they can be listed:

Trade during a “seasoning period” of at least one year in the U.S. over-the-counter market, on another national securities exchange, or on a regulated foreign exchange following the reverse merger;
Timely file with the SEC all required reports since the reverse merger, including the filing of at least one annual report containing audited financial statements for a full fiscal year following the date that all required reverse merger transaction information has been filed with the Commission; and
Maintain a closing stock price of $4 for Nasdaq and NYSE (meet a stock price requirement reflected in the initial listing standard in the Company Guide for NYSE Amex[7]) or higher for a sustained period of time, but in no event for less than 30 of the most recent 60 trading days prior to the date of filing the initial listing application and prior to the date of listing.

The rules also offer exceptions for reverse merger companies that present a low risk of fraud or other illegal activity (such as many special purpose acquisition companies) because they have either:

Completed a substantial firm commitment underwritten public offering in connection with their listing; or
Filed at least four annual reports with the SEC and have met the one-year seasoning period.

During the year the staff issued an Investor Bulletin and CF Disclosure Guidance on Reverse Mergers. Investor Bulletin: Reverse Mergers is available on the SEC website at: http://www.sec.gov/investor/alerts/reversemergers.pdf. The CF Disclosure Guidance is available on the SEC website at: http://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic1.htm.

The NASDAQ’s final rule is available on the SEC’s website at: http://www.sec.gov./rules/sro/nasdaq/2011/34-65708.pdf.

The NYSE’s final rule is available on the SEC’s website at: http://www.sec.gov./rules/sro/nyse/2011/34-65709.pdf.

The NYSE Amex’s final rule is available on the SEC’s website at: http://www.sec.gov./rules/sro/nyseamex/2011/34-65710.pdf.

Rulemaking in Process

Deciding Whether to Incorporate IFRS into U.S. Financial Reporting

During 2011, the Commission and its staff continued work on deciding whether, and if so, how and when, to incorporate IFRS into financial reporting by domestic issuers. In February 2010 the Commission issued a Statement in Support of Convergence and Global Accounting Standards. This statement was accompanied by a detailed Work Plan that the staff will complete to support the SEC’s decision on IFRS. The staff made substantial progress toward completing its work in 2011, publishing two papers that assessed the development and application of IFRS and completing or reaching the final stages of completing the majority of the “field work” related to the Work Plan. However, one of the objectives in the Work Plan is to evaluate the independence of the IASB. The Monitoring Board, which oversees the IFRS Foundation, and the Foundation’s trustees undertook reviews of the Foundation’s governance and strategy and expect to publish their package of governance enhancements in 2012. These are very important activities that the staff still needs to consider in addressing that objective of the Work Plan. Accordingly, in December, Jim Kroeker, the SEC’s Chief Accountant, stated during the AICPA National Conference on Current SEC and PCAOB Developments that the staff will need a few additional months of time to produce its final report. In addition, the FASB’s and IASB’s progress toward completing their priority convergence projects will be relevant to the SEC’s decision, and these projects were not completed in 2011. Therefore, Kroeker also stated that while the staff is in the process of developing an approach for Commission consideration, it is still too early to determine a precise schedule. The staff plans to develop a recommendation “carefully and thoughtfully, being guided by an ideal that produces the maximum benefit for the investing public and the capital markets.”

Possible Incorporation Framework

In May 2011, the staff issued a paper, Exploring a Possible Method of Incorporation, that presented a potential framework for incorporating IFRS into the U.S. financial reporting system. The staff paper outlines a possible approach that incorporates the two most prevalent methods used to incorporate IFRS into a financial reporting system – convergence and endorsement. Under this framework (colloquially referred to as “condorsement”):

U.S. GAAP would be retained as the statutory basis of financial reporting. IFRS would be converged and endorsed by the FASB over a defined period of time. Once the FASB had endorsed an IASB standard, the FASB would integrate it into the U.S. Accounting Standards Codification;
The FASB would continue as the U.S. standard setting body. It would participate in the IFRS standard setting process to assist in the development and promotion of high-quality, globally accepted standards;
Existing differences between U.S. GAAP and IFRS would be eliminated over time through ongoing FASB standard setting efforts over a transitional period (e.g., five to seven years). During this period, the FASB would not work on any new major projects. The FASB’s priority would be to converge existing U.S. GAAP with IFRS for standards that are not on the IASB’s agenda and ensure that existing IFRS standards are suitable for U.S. capital markets; [8]
The FASB would establish a protocol to consider whether new standards issued by the IASB are in the interests of U.S. investors and capital markets; and
The SEC would retain the right to issue reporting and accounting guidance. The Commission would maintain its oversight over the FASB as the designated U.S. national standard setter, and it would actively engage in the IASB’s standard-setting process.

MFA Observations

There seems to be growing support for the approach articulated in the staff’s paper. The SEC held a roundtable discussion of incorporation approaches in July 2011. At that roundtable, participants voiced support for the condorsement approach.[9] In addition, the Financial Accounting Foundation (FAF), which oversees the FASB, added support for the condorsement approach with its comment letter to the SEC dated November 15, 2011, in which it also suggested certain refinements to the approach.[10] However, many remain opposed to this initiative. Many smaller public companies that have little or no foreign operations don’t think the benefits would outweigh the costs of making the changes this initiative would entail. Others object because it doesn’t achieve the goal of a single set of globally accepted accounting standards. Proponents acknowledge this but believe that because it would substantially reduce the differences, it would result in a significant improvement. If such an approach is taken, some of the issues that will need to be addressed are:

What threshold would the FASB use when considering whether to endorse an IASB standard?
Should U.S. companies be given the option of adopting IFRS?
Where would this leave private companies? Should they be required to make the changes public companies will need to make, or should they be allowed to follow some other less costly approach?

SEC Staff Papers

The staff published two papers in November 2011 as a part of the Work Plan that assesses the development and application of IFRS. The staff provided information in the papers rather than conclusions. A summary of the papers follows:

A Comparison of U.S. GAAP and IFRS

The first area of focus in the Work Plan involves an assessment of whether there is sufficient development and application of IFRS for the U.S. domestic reporting system. The staff evaluated financial reporting areas in which IFRS does not provide guidance or where it provides less guidance than U.S. GAAP. The staff analyzed 29 U.S. GAAP Accounting Standards Codification topics and compared them with the corresponding guidance in the IFRS as issued by the IASB and focused on differences at the principles level. Any differences in the topics on the Boards’ current joint standards-setting projects were not included in this analysis. The analysis did not consider any SEC rules and regulations or other staff guidance as it focused on the accounting principles recognized by the standard setters without additional regulatory interpretations.

The staff noted that while IFRS contains “broad principles to account for transactions across industries, with limited specific guidance and stated exceptions to the general guidance,” U.S. GAAP contains more detailed, specific requirements. The staff noted a number of differences relating to industry or transaction specific guidance that exists in U.S. GAAP but not in IFRS. The abundance of specific guidance in U.S. GAAP may contribute to consistency in application across entities operating in a particular industry but does not always result in comparability across industries. In the absence of industry and transaction specific guidance, preparers of IFRS financial statements follow the general principles of IFRS, which may help to promote broader consistency across industries.

The staff also noted that there are fundamental differences that exist between the Boards’ respective conceptual frameworks. Under IFRS, the Conceptual Framework is authoritative guidance, and the concepts are applied when there is no standard or interpretation that specifically applies. Under U.S. GAAP, the Concept Statements were not included in the Accounting Standards Codification and consequently are not authoritative guidance. Also, under U.S. GAAP, the Concepts Statements define an asset or liability in terms of a probable future event. IFRS does not include the concept of probability in the definition of an asset or a liability. Rather, it considers probability in its measurement requirements. The differences in the Boards’ conceptual frameworks and asset/liability definitions can contribute to differences in the recognition and measurement guidance incorporated at the Boards’ standards level.

An Analysis of IFRS in Practice

The second staff paper presents the staff’s observations regarding the application of IFRS in practice. The staff analyzed the most recent annual consolidated financial statements of 183 companies from 22 countries (both SEC registrants and nonregistrants), which prepare financial statements in accordance with IFRS. The companies selected were from the 500 largest global companies ranked by revenues and the significant majority of such companies were from the European Union. Companies from the banking industry represented approximately 20 percent of the sample. The staff read each selected company’s financial statements and collected observations regarding transparency and clarity of disclosures, compliance with applicable accounting standards, and the comparability of financial statements. Further, the staff focused on how the recognition and measurement requirements were applied in practice. The staff then compared these observations for all companies in the analysis to identify trends on an overall basis as well as by country and industry. The paper summarizes the staff’s observations by accounting topic including accounting principles, presentation of financial statements, and accounting for assets, liabilities, shareholders’ equity, revenue, expenses, broad transactions, and certain industry-specific matters.

The staff found that company financial statements generally appeared to comply with IFRS requirements. However, two themes were identified in the analysis:

Transparency and clarity – The staff found that companies could make improvements in this area. The staff noted that some companies did not provide accounting policy disclosures in areas that appeared to be relevant to them. The staff also observed that certain disclosures presented challenges to understanding the nature of a company’s transactions and how those transactions were reflected in the financial statements. In some cases, the disclosure raised questions as to whether the company’s accounting complied with IFRS.
Diversity – The staff noted that diversity in the application of IFRS presented challenges to the comparability of financial statements across countries and industries. In certain instances, the diversity resulted from options permitted by the IFRS standards. In other cases, the diversity appeared to be caused from noncompliance with IFRS.

The paper also presents a summary of frequent areas of comment from the Division of Corporation Finance’s reviews (as part of its disclosure review program) of the most recent SEC filings of 140 of the approximately 170 foreign private issuers that prepare financial statements in accordance with IFRS. The areas of frequent comment overlap significantly with the most frequent areas of comment for issuers that prepare financial statements in accordance with U.S. GAAP: financial instruments, financial statement presentation, impairment of assets, consolidation, revenue recognition, operating segments, income taxes, property, plant and equipment, employee benefits, contingent liabilities, and business combinations.

The Commission’s statement, including the Work Plan, is available on the SEC’s website at: http://www.sec.gov/rules/other/2010/33-9109.pdf.

Additional information about the Work Plan is available on the SEC’s website at: http://www.sec.gov/spotlight/globalaccountingstandards.shtml.

The staff’s 2010 progress report is available on the SEC’s website at: http://www.sec.gov/spotlight/globalaccountingstandards/workplanprogress102910.pdf.

The staff’s paper on the condorsement approach is available on the SEC’s website at: http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-paper-052611.pdf.

The two staff papers on sufficient development and application of IFRS are available on the SEC’s website at: http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-paper-111611-gaap.pdf and http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-paper-111611-practice.pdf.

Listing Standards for Compensation Committees

(Release 33-9199)

In March, the SEC proposed rules to implement Section 952 of the Act. The proposed rules would require the national securities exchanges and associations[11] to establish listing standards that would require:

Each member of a listed issuer’s compensation committee to be a member of the board of directors and to be “independent.” The exchanges would establish the independence requirements (i.e., the SEC would not define independence for compensation committee members) after taking into consideration relevant factors, such as the source of the director’s compensation and affiliations; and
A listed issuer’s compensation committee to be allowed, at its discretion and with the proper funding, to retain or obtain the advice of a compensation consultant, independent legal counsel or other adviser. Before engaging any compensation adviser, the compensation committee would be required to consider factors identified by the SEC that affect the independence of consultants and other advisers (however they would not be required to be independent). In addition, the compensation committee would be required to be directly responsible for the appointment, compensation and oversight of the work of any compensation advisor.

The proposed listing standards would apply only to companies that have listed equity securities. They would not apply to the following types of issuers: controlled companies, limited partnerships, companies in bankruptcy proceedings, open-end management investment companies registered under the Investment Company Act, and foreign private issuers that provide annual disclosures to shareholders of the reasons why the issuer does not have an independent compensation committee.

In addition, the SEC proposed amendments to its proxy rules that would require a company to disclose in its proxy materials whether its compensation committee retained a compensation consultant, whether the work of the compensation consultant raised any conflict of interest, and if so, the nature of the conflict and how the conflict is being addressed. These new disclosures would be integrated with the existing compensation consultant disclosure requirements.

The comment period ended on April 29, 2011. The SEC did not make the Act’s July deadline for adopting rules requiring the national securities exchanges to amend their listing standards and for companies to provide compensation committee disclosures in their proxy materials. After the SEC adopts these rules, additional time will be required for the securities exchanges to adopt changes to their listing standards. The SEC had hoped to finalize these rules in the fourth quarter of 2011 but was unable to do so. The Commission now expects to complete this rulemaking in the first half of 2012.

MFA Observations

The proposed listing standards requiring compensation committee members to be independent would be less restrictive than the audit committee independence requirements mandated by Section 301 of the Sarbanes-Oxley Act of 2002. Directors who receive direct or indirect compensation (other than for services as a director) or who are affiliated persons of a registrant cannot serve on a listed company’s audit committee. Under the proposed SEC rules, the exchanges must consider direct and indirect compensation, affiliate relationships, and other relevant factors when defining independence for compensation committee members, but the SEC would not prohibit compensation committee membership based on these factors.

The compensation committee proposed rules are available on the SEC’s website at: http://www.sec.gov./rules/proposed/2011/33-9199.pdf.

Implementing the Dodd-Frank Act

This section summarizes the status of Commission rulemaking and studies mandated by the Dodd-Frank Act that most directly affect corporate governance and financial reporting.

Internal Control over Financial Reporting Study

In April, the SEC staff concluded in a study required by the Dodd-Frank Act that no changes were required to the ICFR auditor attestation requirement for small accelerated filers with public floats between $75 million and $250 million. The Act also directed the SEC to consider whether reducing the compliance burden or completely exempting such companies from the ICFR audit attestation requirement would encourage companies undertaking initial public offerings to list on exchanges in the U.S. The staff found no conclusive evidence linking the ICFR audit requirements to the listing decisions of the issuers that were studied.

The staff also concluded that:

The costs of ICFR auditor attestation have declined since the Commission first implemented the ICFR audit requirement, particularly in response to the 2007 reforms;[12]
Investors generally view the auditor’s attestation on ICFR as beneficial; and
Financial reporting is more reliable when the auditor is involved with ICFR assessments.
The staff considered public input suggesting certain means to reduce the compliance burden of the ICFR audit and concluded that these suggestions should not be implemented. The staff based its conclusion on its belief that the suggestions might be detrimental to the effectiveness of audits of ICFR and would not maintain investor protections provided by ICFR audits.
In addition to recommending that the ICFR auditor attestation requirement be maintained, the staff encouraged the following activities that have the potential to further improve both the effectiveness and efficiency of ICFR audits:
The PCAOB should publish its observations on top-down, risk based audits of ICFR developed from their inspections; and
The Committee of Sponsoring Organizations of the Treadway Commission (COSO), which has undertaken a project to update its internal control framework, should allow constituents to provide comments on the updated framework.[13]

MFA Observations

Despite the results of the SEC staff’s study, some politicians continue to view ICFR auditing as an obstacle to capital formation and job growth in the U.S. Various legislation has been proposed that would increase the level of public float at which an ICFR auditor attestation would be required and/or defer the requirement for newly public companies.

The Director of the SEC’s Division of Corporation Finance, Meredith Cross, testified at a Congressional hearing on small business capital formation in September and referenced the SEC study discussed above.[14] She reiterated that the staff encourages activities that have the potential to further improve the effectiveness and efficiency of the evaluation of internal controls. She noted that the staff continues to work with the PCAOB to monitor inspection results and assess the extent to which publishing observations can be useful. Further, the staff is observing COSO’s project to review and update its internal control framework referred to above, which is the most common framework used by management and auditors in performing ICFR assessments.

The study is available at on the SEC’s website at: http://sec.gov/news/studies/2011/404bfloat-study.pdf.

Corporate Governance

The Dodd-Frank Act also requires the SEC to adopt rules regarding executive compensation and the manner in which a corporation is governed. As discussed above, the SEC has acted on two of the required rules:

Say-on-pay – Section 951 requires shareholder advisory votes on executive compensation and golden parachutes. These rules were finalized in January.
Compensation committee oversight disclosures – Section 952 requires the SEC to adopt rules directing the stock exchanges to adopt listing standards requiring compensation committee members to be independent. It also requires companies to evaluate whether compensation consultants have conflicting interest and to disclose in proxy materials whether they have done this. These rules were proposed in March.
The Act did not specify a deadline for the following rulemaking; however, the SEC has indicated that it plans to propose and finalize these rules in 2012:
Pay-for-performance and pay ratio disclosures – Section 953 requires issuers to disclose compensation information such as executive compensation compared to stock performance charted over a five year period (termed pay-for-performance) and the ratio of the CEO’s total compensation to the median total compensation of all other company employees.

Registrants have raised concerns that the pay ratio disclosures would be difficult to calculate, especially for global organizations that pay workers in numerous countries. Although Section 953 prescribes the disclosures described above, the SEC staff has indicated that it aims to recommend to the Commission a pay ratio proposal that is both workable and fulfills the statute. The staff has said that it is considering issues such as which employees should be covered under the proposal, how companies should determine the “median” income, and whether compensation disclosures should be furnished or filed. Further, the staff is considering the possibility of allowing the use of statistical sampling to reduce the cost of calculating the ratios.

Compensation clawback policies – Section 954 requires the SEC to direct the exchanges to adopt listing standards that require issuers to develop and implement compensation clawback policies under which they must recover incentive-based executive compensation paid over a three-year look-back period if the issuer has a material accounting restatement.
Director and employee hedging policies – Section 955 requires issuers to disclose whether directors and employees are permitted to hedge against a decrease in value of equity securities granted as compensation.

Other Disclosures

The Act requires issuers to provide the following disclosures if they use conflict minerals, have mine safety issues, or make payments to governments for resource extraction. The SEC proposed rules covering these disclosures in December 2010 and finalized the mine safety rules in 2011.

Conflict Minerals – Section 1502 requires issuers to determine and disclose annually whether any conflict minerals necessary to their production originated in the Democratic Republic of the Congo or an adjoining country.[15] If so, an issuer is required to provide an audited report certified by the issuer describing the measures taken to exercise due diligence on the source and chain of custody of the minerals. The SEC hosted a roundtable on conflict minerals in October in part to address the significant feedback the Commission received on the proposal. The panel focused on approaches for the required reporting, challenges in tracking conflict minerals through the supply chain, and how to make the required due diligence workable. Certain lawmakers and human rights groups have urged the SEC to adopt the final rule without exemptions or delays. Other organizations, including the Small Business Administration’s Office of Advocacy (SBA-OA), have recommended that adoption be delayed due to the burden of implementing the proposal in its current form. The SBA-OA contends that the initial regulatory flexibility analysis (RFA) underestimated both the cost of reporting and the number of small businesses affected by the proposal. The RFA is a key issue for the SEC, as the U.S. Court of Appeals invalidated the SEC’s proxy access rule on the basis of the inadequacy of the SEC’s proxy access RFA (see above).
Mine Safety – Section 1503 requires issuers that are mine operators to disclose in information related to health and safety violations in current and periodic reports. These rules were finalized by the SEC in December and are discussed above.
Resource Extraction Issuer Payments to Governments – Section 1504 requires issuers to disclose annually payments made to the United States or a foreign government for oil, natural gas, or minerals when the issuer develops such resources commercially.

The comment deadline on these proposals was originally January 31, 2011. The Commission extended it to March 2, 2011, and did not make the Act’s April 15, 2011 rulemaking deadline for conflict minerals and payments to governments disclosures. The Commission plans to finalize conflict minerals and resource extraction issuer payment rules in early 2012.

The releases are available on the SEC’s website at: http://www.sec.gov/rules/proposed/2010/34-63547.pdf and http://www.sec.gov/rules/proposed/2010/34-63549.pdf.

The Dodd-Frank Act is available at: http://www.sec.gov./about/laws/wallstreetreform-cpa.pdf.

Staff Guidance

Staff Accounting Bulletin Codification Update

(SAB 114)

In April, the SEC staff issued SAB 114, which updated the guidance included in the codification of the Staff Accounting Bulletins. SAB 114 did not provide new guidance. Rather, it deleted obsolete guidance, revised guidance based on outdated literature, and replaced superseded references with current references. For example, the SAB:

Deleted references to the amortization of goodwill and changed accounting references to Topic 350 of the FASB’s Accounting Standards Codification; and
Eliminated references to Regulation S-B, which was eliminated in 2008.

The SEC staff’s last comprehensive update to the SAB codification was SAB 103, which was issued in 2003.

SAB 114 is available on the SEC’s website at: http://www.sec.gov/interps/account/sab114.pdf.

XBRL

In 2008, the Commission adopted rules requiring all domestic and many foreign registrants to file information in an interactive data format using eXtensible Business Reporting Language. The Commission divided registrants into three groups and began phasing in XBRL reporting in 2009. In June 2011, a portion of the third phase-in group, domestic and foreign filers that prepare their financial statements in accordance with U.S. GAAP and are not large accelerated filers, began XBRL reporting. In addition, the temporary (two year) partial relief from liability with respect to interactive data files pursuant to Rule 406T of Regulation S-T began to expire for issuers in the first phase-in group, and those registrants’ interactive data files are now subject to the same liability provisions as the rest of their filings.[16]

In 2009 and 2010, the staff provided guidance that focused on transition questions. During 2011, the SEC staff continued to address transition questions and also began providing guidance regarding ongoing requirements and applying the rules after the phase-in period is over.

Registration statements filed during phase-in – Interactive data files are required in non-IPO Securities Act registration statements that contain a price or price range and present financial statements. During phase-in, this can accelerate tagging requirements for an issuer that presents (rather than incorporating by reference) its financial statements in a registration statement. Consider, for example, a calendar year-end issuer in the third phase-in group files a registration statement on Form S-1 in December 2012. If the issuer incorporates by reference its December 31, 2011 and September 30, 2012 financial statements included in its most recent Form 10-K and 10-Q, it will not need to resubmit the previously submitted interactive data files with the registration statement. As a result, the financial statements incorporated by reference in the registration statement will have different levels of tagging. (The interactive data file in the 2011 Form 10-K will be block tagged, while the interactive data file in the September 2012 Form 10-Q will be detail tagged.) However, if the issuer instead presents its financial statements in the registration statement, then the issuer will be required to submit with the registration statement an interactive data file in which both the annual and interim financial statements are detail tagged, because the September 2012 interim financial statements cover a period ending on or after the issuer’s June 15, 2012 detail tagging phase-in date.[17]
Form 8-Ks filed during phase-in – When a registrant files only annual audited financial statements in a Form 8-K (for example to revise them to reflect a subsequent event such as a discontinued operation), the level of tagging can be consistent with the level reflected in the issuer’s Form 10-K in which the financial statements were originally filed. Consider, for example, a calendar year-end issuer in the third phase-in group that discontinued an operation in the third quarter of 2012. Prior to filing a registration statement on Form S-3 in December 2012, the issuer files revised annual audited financial statements that reflect the discontinued operation. Even though the interactive data files in the issuer’s June and September 2012 Form 10-Qs reflected detail tagging, the interactive data file accompanying the audited 2011 annual financial statements in the Form 8-K may continue to reflect block tagging. The staff has not addressed the tagging requirements in a Form 8-K that reflects both annual and interim financial statements (e.g., if the issuer discussed in the example above filed a Form 8-K to retrospectively revise both its September 2012 interim and December 2011 annual financial statements to reflect a measurement period adjustment made pursuant to ASC 805). A registrant with this fact pattern should consider discussing the requirements with the SEC staff.[18]
Phase-in by IFRS filers – Foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB are part of the third phase-in group and were scheduled to begin XBRL reporting in 2011. However, the taxonomy for IFRS is not yet complete. As a result, the SEC staff issued a no action letter in which it states that such issuers are not required to submit XBRL documents until the Commission specifies on its website an IFRS taxonomy for them to use.[19] In addition, the staff has informally stated that it expects the Commission to provide ample time between the date it approves an IFRS taxonomy and the date it requires tagging to begin, and it has observed that the Commission provided six months when the rules were first applied by domestic filers. Therefore, it is unlikely that a foreign private issuer that reports using IFRS will need to provide an interactive data file with its 2011 Form 20-F.[20]
Effect of location – Information for which interactive data files must be submitted includes a registrant’s primary financial statements, notes and financial statement schedules for all periods covered by the financial statements. If any of the information required by the accounting standards is presented outside the financial statements, such as segment information (e.g., if such information is presented within Item 1 of Form 10-K, Business), it must be tagged. Also, if information is not required by the accounting standards but is nevertheless presented within the financial statements (e.g., selected quarterly data required by Item 302 of Regulation S-K), it must be tagged. However, such information need not be tagged if it is presented outside the financial statements.[21]
Transition to XBRL reporting by a newly public company after phase-in is complete – Interactive data files are not required in initial registration statements. An interactive data file first is required with a periodic report on Form 10-Q, and if that report covers a period that ends on or after June 15, 2012, the interactive data file must be detail tagged. Therefore, if a newly public company’s first periodic report as an SEC registrant is its Form 10-Q for the quarter ending September 30, 2012, it would need to include an interactive data file in that Form 10-Q and it would need to be detail tagged. If this company instead went public in December 2012 and it first report as an Exchange Act registrant was its Form 10-K for the year ending December 31, 2012, that Form 10-K would not need to include an interactive data file. The company would need to include an interactive data file in its Form 10-Q for the quarter ending March 31, 2013, and it would need to be detail tagged. The 30 day grace period provided by Rule 405(a)(2)(ii) of Regulation S-T is available for a newly public company’s initial interactive data file submission. The temporary (two year) partial relief from liability with respect to interactive data files pursuant to Rule 406T of Regulation S-T expires October 31, 2014. If a newly public company files an interactive data file after that date, the interactive data file is subject to the same liability provisions as the rest of the filing.[22]

Over the past two years, the SEC staff has also reviewed and provided informal feedback on the submitted XBRL exhibits and offered the following insights:

Data Quality – The tagging process is the key to creating a quality XBRL submission. Being familiar with the taxonomy, the standard list of tags used for financial reporting in interactive format consistent with U.S. GAAP and the Commission regulations will enable registrants to select the tag that best represents the financial information in their financial statements. Filers have often created unnecessary extensions and not appropriately identified the existing elements.
Viewing/Rendering – The rendered XBRL file will not always be identical to the financial statements that correspond to traditional HTML submissions. The staff has cautioned filers not to manipulate the tagged data for visual effect, and that the integrity of the individual XBRL elements should be maintained. The use of a previewer will aid in verifying the completeness of the XBRL exhibit. Service providers and software vendors offer reports and software tools that can validate the completeness and appropriateness of the tagged information.
Validation Tools – Validation tools provided by vendors and the SEC test filing mechanism should be used to ensure technical validity of the XBRL file. The SEC previewer and validation tools have been updated. Registrants should allow sufficient time to pre-validate their submission to ensure acceptance and time for any last minute corrections in case of rejection before the deadline.

The SEC staff is available to answer questions. A registrant can send an email to ask-oid@sec.gov or call (202) 551-5494.

During the year the staff added a Small Business Compliance Guide, reviewed XBRL submissions and added to its observations, and updated its FAQs and C&DIs. The staff also updated the resource page on the SEC’s website. We have provided links to these resources below.

Interactive Data for Financial Reporting, Small Business Compliance Guide: http://www.sec.gov/info/smallbus/secg/interactivedata-secg.htm.
The staff updated its observations from its review of interactive data submissions in December and added a Summary of XBRL Information for Group 3 filers. They are available on the SEC’s website at: http://www.sec.gov/spotlight/xbrl/staff-review-observations.shtml.
The staff’s updated interpretations and FAQs related to interactive data submissions are available on the SEC’s website at: http://www.sec.gov/spotlight/xbrl/staff-interps.shtml.
The XBRL C&DIs are available on the SEC’s website at: http://www.sec.gov./divisions/corpfin/guidance/interactivedatainterp.htm.
The XBRL resource page is available on the SEC’s website at: http://xbrl.sec.gov.

Form 8-K Reporting When a Registrant Acquires a Foreign Private Issuer or a Foreign Business

During 2011 the SEC staff revised the FRM to clarify the age of financial statements requirements in a Form 8-K that reports the acquisition of a business that is a foreign private issuer or a foreign business:

Annual audited financial statements required three months after year end – If a registrant acquires a significant foreign private issuer or foreign business and files the related Form 8-K more than three months after the acquired company’s fiscal year end, then the Form 8-K must provide the target’s audited financial statements for its most recently completed year.

For example, Company A, a domestic registrant, acquires Company F, a foreign business, on April 15, 2012. Both Company A and Company F have calendar year ends, and Company A determines that it needs to file one year of Company F’s financial statements. When Company A files the Form 8-K or Form 8-K/A to provide the financial statements of its significant acquisition, it must provide Company F’s audited financial statements for the year ended December 31, 2011. The date of the initial Form 8-K filing was more than three months after Company F’s year end, so Company F’s 2011 audited financial statements must be provided.

Interim financial statements required nine months after year end – If a registrant acquires a significant foreign private issuer or foreign business and files the related Form 8-K more than nine months after the end of the acquired company’s most recently completed fiscal year, then the Form 8-K must provide the target’s interim financial statements for its at least the first six months of the current year.

For example, Company B, a domestic registrant, acquired Company G, a foreign business, on October 20, 2012. Both Company B and Company G have calendar year ends, and Company B determines that it needs to file one year of Company G’s financial statements. When Company B files the Form 8-K or Form 8-K/A to provide the financial statements of its significant acquisition, it must provide Company G’s audited financial statements for the year ended December 31, 2011. It must also provide Company G’s unaudited interim financial statements for the six months ended June 30, 2012 and the comparative prior year period.

Sections 2045.14 and 2045.15 of the FRM address Form 8-K reporting for significant acquisitions of foreign private issuers and foreign businesses. The FRM is available on the SEC’s website at: http://www.sec.gov./divisions/corpfin/cffinancialreportingmanual.shtml.

MFA Observations

In many cases, registrants are required to update audited annual financial statements sooner when they file them in a 1933 Act registration statement than when they file them in a 1934 Act annual report. Domestic registrants that do not meet certain profitability tests (those in Rule 3-01(c) of Regulation S-X) need to update on the 46th day after year end in a 1933 Act filing, but 1934 Act annual reports containing current year financial statements are not due until the 60th, 75th or 90th day[23] after a registrants’ year end. Similarly, foreign registrants need to update three months after year end in a 1933 Act filing but the annual reports they file under the 1934 Act are not due until four months after year end.

Form 8-K is a report that a registrant files to comply with its reporting obligations under the 1934 Act. For domestic targets, the requirement to update audited annual financial statements in a Form 8-K is consistent with the requirement for 1934 Act annual reports. The audited annual financial statements of a domestic target that is not an accelerated filer or a large accelerated filer do not need to be updated until the 90th day after a target’s year end, regardless of whether the registrant meets the profitability tests in Rule 3-01(c). For a foreign target, the approach the staff uses is different. The staff requires updating in a Form 8-K according to the same timetable as the one that must be met when filing a registration statement under the 1933 Act. Registrants should recognize this inconsistency when determining the Form 8-K filing requirements for acquired foreign targets. In addition, if a registrant acquires a foreign target that is itself a registrant (i.e., it is a foreign private issuer), there has always been a possibility that the rules could require updated target financial statements in a 1933 Act registration statement sooner than the target would be required to file them in its 1934 Act reports. The Form 8-K requirement to provide audited financial statements three months after the target’s year end could also result in the need for to file updated target financial statements on a Form 8-K sooner than the target would otherwise be required to file them.

Conditional Subsidiary Guarantees

As a general rule, every issuer and guarantor of a registered security is required to file the financial statements that would be required of a registrant under Regulation S-X.[24] For example, if a parent registers debt instruments that are guaranteed by its subsidiaries, the general rule would require separate financial statements of the subsidiaries. However, Rule 3-10 of Regulation S-X allows a registrant to present condensed consolidating financial information in a footnote in lieu of separate financial statements if certain criteria are met. To qualify for this relief, among other conditions, the guarantees must be full and unconditional.

The SEC staff believes that whether a guarantee is full and unconditional should not be assessed solely in terms of the extent of a guarantee. Rather, the assessment must also consider a guarantee’s duration. The staff believes that if a guarantee will not be in place continuously throughout the life of the registered security (e.g., if a guarantor can “opt out” of the guarantee during the term of the debt), the guarantee is not full and unconditional.

During 2011 the staff determined that contracts covering high yield notes frequently allow the release of subsidiary guarantees before the notes are extinguished, and many of the contract provisions are so common that the staff considers them to be “customary.” The staff believes that such guarantees do not meet the definition of “full and unconditional” in Rule 3-10(h)(2) of Regulation S-X. However, the staff concluded that if the conditions under which a subsidiary may be released from a guarantee are limited to those the staff considers to be customary, it does not need to require registrants to provide the full separate guarantor financial statements required by Rule 3-10. Instead, condensed consolidating financial information is sufficient.

The staff revised paragraph 2510.5 of the FRM to reflect this view, and that paragraph now contains the following list of customary release provisions:

The subsidiary is sold or sells all of its assets;
The subsidiary is declared “unrestricted” for covenant purposes;
The subsidiary’s guarantee of other indebtedness is terminated or released;
The requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied;
The rating on the parent’s debt securities is changed to investment grade; or
The parent’s debt securities are converted or exchanged into equity securities.

If debt agreements contain other types of release provisions, the staff advises registrants to consider contacting the Office of Chief Counsel in the Division of Corporation Finance to discuss whether relief from the Rule 3-10 requirement to provide guarantor financial statements is available.

Section 2510.5 of the FRM addresses subsidiary guarantee release provisions and is available on the SEC’s website at: http://www.sec.gov./divisions/corpfin/cffinancialreportingmanual.shtml.

MFA Observations

In applying this new guidance, the following should be considered:

Deciding whether a release provision is customary will require judgment and may require consultation with legal counsel and the staff.
If some subsidiary guarantees are full and unconditional and others are not, then in its condensed consolidating financial information a registrant should present separate columns for the subsidiaries whose guarantees are full and unconditional and those whose guarantees are not. The new guidance does not provide relief from this aspect of Rule 3-10(i)(6).
If customary release provisions are present, a registrant cannot state in its disclosure that all guarantees are full and unconditional. (Rule 3-10(i)(8)(ii) requires a statement to this effect if it is true.)
We expect that disclosure of the release provisions will typically be considered necessary to comply with Rule 3-10(i)(11).
We understand that the SEC staff believes that a provision allowing a guarantor to “opt out” of a guarantee at will (vs. pursuant to specified conditions) is not a customary release provision. A registrant with such a provision is required to fully comply with Rule 3-10.
The relief provided by this guidance is available only to subsidiary guarantors. It is not available when a conditional guarantee is provided by a parent guarantor.

Recently Acquired Guarantors

At the June Center for Audit Quality (CAQ) SEC Regulations Committee meeting, the SEC staff clarified the requirements applicable to financial statements of recently acquired guarantors that registrants provide to comply with Rule 3-10(g) of Regulation S-X. In a registration statement for guaranteed debt, Rule 3-10(g) requires separate pre-acquisition financial statements of a recently acquired subsidiary guarantor in the following circumstances, even if the acquired guarantor otherwise qualifies for omission of separate financial statements:

The subsidiary has not been included in the audited results of the parent company for at least nine months of the most recent fiscal year; and
The greater of the net book value or purchase price of the subsidiary is 20 percent or more of the principal amount of the securities being registered.

Since a recently acquired subsidiary guarantor is considered an issuer, the staff believes that the auditor of its financial statements must be registered with the PCAOB and follow PCAOB standards, and its financial statements must comply with Regulation S-X. In addition, if a subsidiary guarantor meets the definition of a “public company” in the respective section of the Accounting Standards Codification, its financial statements must include the applicable disclosures.

Prior to filing a registration statement for an offering of guaranteed debt, a company may have filed pre-acquisition financial statements of an acquired guarantor to comply with Item 9.01 of Form 8-K, with an audit conducted by a non-registered auditing firm. The staff observed that if compliance with Rule 3-10(g) presents a hardship (e.g., requiring a reaudit by a registered public accounting firm or to comply with PCAOB standards), companies should consult with the Division of Corporation Finance Office of the Chief Accountant prior to filing the registration statement.

The CAQ SEC Regulations Committee minutes are available on the CAQ’s website at: http://thecaq.org/resources/secregs/highlights.htm.

Due Dates for Reports Filed After a Reverse Acquisition

This year the SEC staff revised the FRM to clarify the due date of the financial statements of a private domestic operating company that merges with a public shell in a reverse acquisition. The staff clarified the requirements when a public shell merges with a private operating company, and the combination occurs after the end of the private company’s most recently completed annual or quarterly period, but before financial statements for that annual or quarterly period would be required to be presented in the Form 8-K that reports the reverse acquisition. In these circumstances, the public shell must file the appropriate annual or quarterly report when due. Also, the registrant must file an amended Form 8-K with the financial statements for the private operating company’s most recently completed annual or quarterly period prior to the date of the reverse acquisition, as applicable, within 90 or 45 days, respectively, after the private operating company’s period end.

For example, assume public shell S and private operating company P both have a calendar year end and merge in a reverse acquisition on February 1, 2012. Within four business days of the transaction, S files the audited financial statements of P for the three years ended December 31, 2010 and the unaudited financial statements for the interim period ended September 30, 2011 and comparable prior period on Form 8-K, in addition to the other information required by Items 2.01, 5.01, 5.06, and 9.01. S files its annual report on Form 10-K for the year ended December 31, 2011 by March 30, 2012 (within 90 days of its year end). In addition, S files the same information that would be required in a Form 10-K of P in an amended Form 8-K by the same Form 10-K due date – March 30, 2012.

Section 12,220.1.c of the FRM addresses due dates for reports filed after reverse acquisitions and is available on the SEC’s website at: http://www.sec.gov./divisions/corpfin/cffinancialreportingmanual.shtml.

Other Comprehensive Income

Accounting Standards Update 2011-5, as amended by ASU 2011-12, revises ASC 220, Comprehensive Income, to require that a registrant report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The ASU eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to ASC 220 require retrospective application and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted.

If a registrant does not early adopt ASU 2011-5, then after it files its first fiscal quarterly financial statements that reflect the adoption of ASU 2011-5, its prior annual financial statements will need to be revised to retrospectively apply the ASU. Technically, the prior annual financial statements will need to be revised before they can be included or incorporated by reference in a new or amended registration statement filed under the Securities Act or Exchange Act.

ASU 2011-5 is primarily a presentation standard and does not affect accounting measurements. Accordingly, the SEC staff has decided that it is willing to make an accommodation to registrants, i.e., to allow them to incorporate their prior annual financial statements by reference, even if they do not reflect the application of the ASU. At the September CAQ SEC Regulations Committee meeting, the staff stated that it would not object if a registrant concludes, and its auditor agrees, that there is no need to retrospectively revise previously issued annual financial statements that are incorporated by reference into that registration statement. However, the filing must include prominent transparent disclosure of the following (e.g., in a selected financial data type table) retrospectively revised information for the periods that would be shown in retrospectively revised financial statements if they had been filed:

Net income;
Components of other comprehensive income that would be on the face of the financial statements in accordance with ASU 2011-5;
Total other comprehensive income; and
Total comprehensive income.

The CAQ SEC Regulations Committee minutes are available on the CAQ’s website at: http://thecaq.org/resources/secregs/highlights.htm.

MFA Observations

The accommodation described above applies only to registrants that incorporate their prior annual financial statements by reference. It is not available to registrants that present their financial statements in their registration statement.

The additional disclosures listed above could be provided in a filing that is incorporated by reference in the registration statement (e.g., a Form 8-K or Form 10-Q). They do not need to be presented in a registration statement.

A registrant planning to incorporate by reference in a new registration statement in 2012 can, of course, avoid the need to provide the additional disclosures listed above by early adopting the ASU when it next files its annual financial statements.

Financial Reporting Manual

The SEC staff made substantive updates to its FRM three times during 2011. In addition, in early September the staff revised the FRM to reflect only non-substantive wording/style changes. The staff may continue the practice of periodically posting style changes in updates that are separate from updates that reflect substantive changes. The substantive updates covered changes to reflect topics covered during several years of CAQ SEC Regulations Committee meetings, the matters discussed above, and the reporting requirements when a consolidated variable interest entity makes an acquisition or disposition.[25]

This year the staff began providing a summary immediately following the cover that lists the paragraphs that were updated and describes the nature of the changes. The staff continues to annotate the FRM to communicate the date a paragraph was most recently updated. The FRM is available on the SEC’s website at: http://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.shtml.

Compliance and Disclosure Interpretations

The SEC staff updated its C&DIs throughout the year. The updates provided guidance on topics such as reporting requirements when there is a change in accountants, say-on-pay, say-on golden parachutes, and various legal matters.

The C&DIs are available on the SEC’s website at: http://www.sec.gov/divisions/corpfin/cfguidance.shtml.

CF Disclosure Guidance

The staff of the Division of Corporation Finance introduced a new form of guidance this year, CF Disclosure Guidance. The staff has commented that it previously issued this type of guidance in the form of “Dear CFO” letters, and this new approach is designed to address a wider group of registrants. The staff issued CF Disclosure Guidance covering the following three topics during the year:

Staff Observations in the Review of Forms 8-K Filed to Report Reverse Mergers and Similar Transactions
Cybersecurity
Staff Observations in the Review of Promotional and Sales Material Submitted Pursuant to Securities Act Industry Guide 5 CF Disclosure Guidance is available on the SEC’s website at: http://www.sec.gov/divisions/corpfin/cfdisclosure.shtml.

Other Guidance Regarding Common Financial Reporting Issues

The SEC staff provided a webcast presentation covering common financial reporting issues it encounters. The webcast was hosted by the CAQ. The presentation can be viewed at: http://video.webcasts.com/events/pmny001/viewer/eFrame.jsp?mei=38939&cf=aicp001&tp=.

Smaller Reporting Companies

During 2011, the SEC staff released two guides that explain how rules adopted by the SEC apply to smaller public companies:

Facilitating Shareholder Director Nominations – The SEC staff prepared this guide to explain the amendments to the shareholder proposal rule (Exchange Act Rule 14a-8). This rule requires companies to include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company’s by-laws for the inclusion of one or more shareholder director nominees in the company’s proxy materials. The guide is available on the SEC’s website at: http://www.sec.gov./info/smallbus/secg/14a-8-secg.htm.
Shareholder Approval of Executive Compensation and Golden Parachute Compensation – This guide explains the say-on-pay, frequency of say-on-pay, and golden parachute shareholder advisory votes that are discussed in the Corporate Governance section of this publication. The guide is available on the SEC’s website at: http://www.sec.gov./rules/final/2011/33-9178-secg.htm.

In the C&DIs issued in 2011, the staff provided guidance regarding transition in and out of smaller reporting company status and how this affects the need for say-on-pay shareholder votes. As noted above, these votes are not required for smaller reporting companies until annual meetings occurring on or after January 21, 2013. The relevant C&DIs are available on the SEC’s website at: http://www.sec.gov/divisions/corpfin/guidance/exchangeactrules-interps.htm.

PCAOB Developments

Proposed Standards and Amendments

In July, the PCAOB proposed an auditing standard, Auditing Supplemental Information Accompanying Audited Financial Statements, which would supersede AU 551, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents, and related amendments to certain PCAOB auditing standards. This proposal would establish an auditor’s responsibilities when engaged to audit and report on supplemental information that accompanies the audited financial statements included in SEC filings. An example of such supplemental information is the supporting schedules that brokers and dealers are required to file with the SEC. Comments on the proposal were due September 12, 2011.

In October, the PCAOB proposed for comment amendments to its standards that would require registered accounting firms to disclose the name of the engagement partner in the audit report and on PCAOB Form 2, the annual report filed by a registered public accounting firm. The proposed amendments would also require disclosure in the audit report of other accounting firms and other persons not employed by the auditor that took part in the audit. Comments on the proposal were due January 12, 2012.

In December, the PCAOB reproposed a standard it originally proposed in 2010, Communications with Audit Committees. Like the original proposal, the reproposed standard would establish requirements that enhance the relevance and quality of the communications between the auditor and audit committee. However, the reproposed standard aligns the communication requirements with the recently issued risk assessment standards (Auditing Standards 8 – 15). It also includes certain changes based on comments received during the original comment period, such as adding a requirement that the auditor communicate to the audit committee any significant transactions outside the normal course of business for the company, and a requirement for the auditor to communicate the events and conditions identified by the auditor that indicate there could be substantial doubt about the company’s ability to continue as a going concern. The reproposed standard would supersede PCAOB interim standard AU sec. 380, Communication with Audit Committees, and AU sec. 310, Appointment of the Independent Auditor, and amend other PCAOB standards. Comments on the reproposed standard are due February 29, 2012.

The PCAOB has not yet finalized another standard it proposed in 2010, Confirmation.

The proposed standards and amendments can be found on the PCAOB’s website, within the Current Standard-Setting and Related Rulemaking Activities section, at: http://pcaobus.org/Standards/Pages/CurrentStatus.aspx.

Concept Releases

In June, the PCAOB issued a concept release to solicit public comment on alternatives for changing the auditor’s reporting model. These alternatives include:

Adding an auditor’s discussion and analysis;
Requiring and expanding the use of emphasis paragraphs;
Requiring assurance on other information outside the financial statements; and
Clarifying the language in the standard auditor’s report.

Comments were due September 30, 2011, and the release encouraged the public to comment on the reporting alternatives. The concept release can be found on the PCAOB’s website, within the Current Standard-Setting and Related Rulemaking Activities section, at: http://pcaobus.org/Standards/Pages/CurrentStatus.aspx.

In August, the PCAOB also issued a concept release to solicit public comment on ways that auditor independence, objectivity, and professional skepticism can be enhanced, including the possibility of mandatory audit firm rotation, which would limit the number of consecutive years for which a registered public accounting firm could serve as the auditor of a public company. Comments were due on December 14, 2011. The concept release can be found on the PCAOB’s website, within the Current Standard-Setting and Related Rulemaking Activities section, at: http://pcaobus.org/Standards/Pages/CurrentStatus.aspx.

Guidance

Staff Audit Practice Alerts

In October, the PCAOB issued Staff Audit Practice Alert 8, Audit Risks in Certain Emerging Markets. As with all other staff audit practice alerts, this Alert does not introduce any new auditing requirements, but instead highlights circumstances that may affect how auditors conduct audits under existing standards. The Alert focuses on fraud risks that auditors might encounter in audits of companies with operations in emerging markets, auditors’ responsibilities for addressing those risks, and certain other auditor responsibilities under PCAOB standards. While the situations described in the Alert have been observed in audits of companies in certain emerging markets, the matters discussed in the Alert are relevant whenever such conditions or fraud risks are present in audits of companies located in either emerging or developed markets.

The Alert is available on the PCAOB’s website, within the Staff Audit Practice Alerts section, at: http://pcaobus.org/Standards/Pages/Guidance.aspx.

In December, the PCAOB issued Staff Audit Practice Alert 9, Assessing and Responding to Risk in the Current Economic Environment. This Alert updates Staff Audit Practice Alert 3, Audit Considerations in the Current Economic Environment, which was issued in December 2008. Alert 9 discusses issues relevant to current global economic conditions, and highlights certain requirements in the new risk assessment standards (Auditing Standards 8 – 15). Alert 9 is organized into four sections: (1) considering the impact of economic conditions on the audit; (2) auditing fair value measurements and estimates; (3) the auditor’s consideration of a company’s ability to continue as a going concern; and (4) auditing financial statement disclosures.

Alert 9 is available at http://pcaobus.org/Standards/Pages/Guidance.aspx.

Research Note

In March, the PCAOB issued its first public Research Note, entitled Activity Summary and Audit Implications for Reverse Mergers Involving Companies from the China Region (January 1, 2007 through March 31, 2010). The Research Note provides new data on the growth of reverse mergers involving companies from China, Hong Kong, and Taiwan, and provides further context to the issues discussed in Staff Audit Practice Alert 6, Auditor Considerations Regarding Using the Work of Other Auditors and Engaging Assistants from Outside the Firm.

The Research Note is available on the PCAOB’s website, within the Research & Analysis section, at: http://pcaobus.org/Research/Documents/Chinese_Reverse_Merger_Research_Note.pdf.

[1] The FRM is an internal SEC staff reference document that provides general guidance covering several SEC reporting topics. While the FRM is not authoritative, it is often a helpful source of guidance for evaluating SEC reporting issues.

[2] Smaller reporting companies are not required to provide a Compensation Discussion and Analysis and therefore are not required to provide this disclosure.

[3] John Laide, “Dodd-Frank Say on Pay Proposal Scorecard,” July 1, 2011 (https://www.sharkrepellent.net/request?an=dt.getPage&st=1&pg=/pub/rs_20110701.html&Dodd-Frank_Say_on_Pay_Proposal_ScoreCard&rnd=72131).

[4] Richard Luss, Todd Manas and Steve Seelig, Towers Watson, “Survey Points to Further Refinements in Executive Pay Programs and Processes as U.S. Companies Adapt to the Say-on-Pay Environment,” Executive Compensation Bulletin, August 12, 2011 (http://www.towerswatson.com/assets/pdf/5242/EC-Bulletin-Seelig-Manas-Luss.pdf).

[5] Semler Brossy Consulting Group, LLC, “2011 Say on Pay Results: Russell 3000, Shareholder Voting and Responses to Proxy Advisers,” July 21, 2011 (http://www.semlerbrossy.com/pages/pdf/SOP_Update.pdf).

[6] Factors that may provide a basis for such a belief include an investment grade credit rating, a previous investment grade credit rating on a security issued in a similar offering, or a previous assignment of a preliminary investment grade rating.

[7] See Section 102 of the Company Guide at: http://cchwallstreet.com/AMEXtools/PlatformViewer.asp?SelectedNode=chp_1_1_1&manual=/AMEX/CompanyGuide/amex-company-guide/.

[8] In this framework, the staff assumed that the convergence projects outlined in the Boards’ 2006 Memorandum of Understanding and other joint projects (financial instruments, revenue recognition, leases, the presentation of other comprehensive income, balance sheet netting of derivative and other financial instruments, financial instruments with characteristics of equity, financial statement presentation, presentation of discontinued operations, consolidation of voting interest entities, and insurance contracts) would be completed before commencement of any U.S. transition to IFRS, and would have little effect on the transition plan. The staff notes that if implementation efforts for the standards coincide with elements of the transition plan, the FASB will take the timing of these projects into account in the overall convergence plan.

[9] See the video and audio webcast archive of the IFRS Roundtable at: http://sec.gov/news/otherwebcasts/2011/ifrsroundtable070711.shtml.

[10] See the FAF letter to the SEC at: http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=Document_C&pagename=Foundation%2FDocument_C%2FFAFDocumentPage&cid=1176159309272.

[11] The OTC Bulletin Board and the OTC Markets Group (previously known as the Pink Sheets and Pink OTC Markets) would not be affected by the proposed requirements, and therefore issuers whose securities are quoted on these interdealer quotation systems similarly would not be affected, unless their securities also are listed on an exchange.

[12] In 2007, the SEC issued interpretive Release 33-8810, Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Also, the PCAOB issued Auditing Standard 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, to address costs in conducting an effective audit of internal controls.

[13] An Exposure Draft of the update to COSO’s 1992 Internal Control-Integrated Framework was released in December 2011, and comments may be submitted until March 31, 2012.

[14] Meredith Cross, Testimony on “Legislative Proposals to Facilitate Small Business Capital Formation and Job Creation,” September 21, 2011, http://www.sec.gov/news/testimony/2011/ts092111mbc-ln.htm#P82_34292.

[15] Conflict minerals are minerals mined in conditions of armed conflict and human rights abuses. The term conflict mineral is defined in Section 1502(e)(4) of the Act as cassiterite, columbite-tantalite (the metal ore from which tin is extracted), gold, wolframite (the metal ore from which tungsten is extracted, or their derivatives, or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the Democratic Republic of Congo or adjoining countries.

[16] For all issuers, controls and procedures with respect to interactive data fall within the scope of their disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15), which must be evaluated and reported on pursuant to those rules and Item 307 of Regulation S-K. However, Exchange Act Rules 13a-14 and 15d-14 exclude interactive data from officer certifications, which, among other things, describe the officers’ responsibility for establishing and maintaining disclosure controls and procedures and require statements regarding their design and evaluation. See interpretation 162.01 of the Compliance and Disclosure Interpretations covering interactive data available at: http://www.sec.gov/divisions/corpfin/guidance/interactivedatainterp.htm.

[17] Center for Audit Quality SEC Regulations Committee Minutes, September 27, 2011, http://thecaq.org/resources/secregs/highlights.htm.

[18] Center for Audit Quality SEC Regulations Committee Minutes, September 27, 2011, http://thecaq.org/resources/secregs/highlights.htm.

[19] The no action letter is available on the SEC’s website at: http://www.sec.gov/divisions/corpfin/cf-noaction/2011/caq040811.htm.

[20] Center for Audit Quality SEC Regulations Committee Minutes, June 28, 2011, http://thecaq.org/resources/secregs/highlights.htm.

[21] Center for Audit Quality SEC Regulations Committee Minutes, June 28, 2011, http://thecaq.org/resources/secregs/highlights.htm.

[22] Center for Audit Quality SEC Regulations Committee Minutes, June 28, 2011, http://thecaq.org/resources/secregs/highlights.htm.

[23] The number of days depends on whether the registrant is a large accelerated filer, an accelerated filer or neither.

[24] Rule 3-10(a) of Regulation S-X.

[25] For further information regarding the reporting requirements when a consolidated variable interest entity makes an acquisition or disposition, see paragraph 2005.8 of the FRM.

Material Discussed in this Alert is meant to provide general information and should not be acted on without obtaining professional advice tailored to your firm's individual needs. The information is for general guidance only and is not a substitute for professional advice.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Tracy W. Curley
Principal — Public Company Practice
(978) 557-5392
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