New Disclosure Rules Proposed by SEC
 
February 14, 2002
 
Steven Sonberg - Miami

On February 13, 2002, the Securities and Exchange Commission (SEC) announced that it will propose new rules (Proposed Rules) as the first step in its efforts to improve the current financial reporting and disclosure system. The Proposed Rules will:

• Accelerate reporting of transactions by insiders in company securities
• Shorten filing deadlines for annual and quarterly reports
• Expand the list of events requiring disclosure on current reports
• Require posting of Exchange Act reports on company web sites upon their filing with the SEC, and
• Require significant disclosure of critical accounting policies in annual reports

Accelerated Insider Reporting

The Proposed Rules will accelerate reporting requirements for transactions by insiders in company securities. Under the Exchange Act, insiders may delay reporting such transactions by up to 40 days from the date they occur. In favoring a dramatically shorter period for such disclosure, the SEC will propose that companies disclose significant transactions by executive officers and directors in the company's stock on a current basis.

The SEC is also proposing to require companies to report on a current basis any transaction it has entered into with its executive officers or directors involving the company's securities. Existing rules permit insiders to postpone reporting these transactions until 45 days after the end of the fiscal year.

In connection with these proposed changes, the SEC is considering whether to require companies to electronically file the information they receive from their insiders with respect to transactions in the company's securities.

Shorter Filing Deadlines for Annual and Quarterly Reports

Another significant result of the Proposed Rules is the shorter deadlines for filing annual reports and quarterly reports under the Exchange Act. Specifically, annual reports on Form 10-K will have to be filed within 60 days after the end of the fiscal year, rather than 90 days. Quarterly reports on Form 10-Q will have to be filed within 30 days after the end of the first three fiscal quarters, rather than 45 days.

Increased Disclosure on Current Reports

Additionally, the Proposed Rules expand the types of information that must be reported in a current report on Form 8-K. Some of the items the SEC intends to require in these reports include:

• Changes in rating agency decisions and other rating agency contacts
• Transactions in the company's securities, including derivative securities, with executive officers and directors
• Defaults and other events that could trigger acceleration of direct or contingent obligations
• Transactions that result in material direct or contingent obligations not included in a prospectus filed by the company with the SEC
• Offerings of equity securities not included in a prospectus filed by the company with the SEC
• Waivers of corporate ethics and conduct rules for officers, directors and other key employees
• Material modifications to rights of security holders
• Departure of the company's CEO, CFO, COO or president (or persons in equivalent positions)
• Notices that reliance on a prior audit is no longer permissible, or that the auditor will not consent to use of its report in a Securities Act filing
• Definitive agreements that are material to the company
• Any loss or gain of a material customer or contract
• Any material write-offs, restructurings or impairments
• Any material change in accounting policy or estimate
• Movement or de-listing of the company's securities from one quotation system or exchange to another, and
• Any material events, including the beginning and end of lock-out periods, regarding the company's employee benefit, retirement and stock ownership plans

In addition to increasing the number of events requiring disclosure on current reports, the SEC intends to decrease the amount of time in which these reports must be filed. The SEC will expect reports for these events to be filed no later than the second business day following their occurrence. The SEC is also considering whether some of these events will require filing by the opening of business on the day after they occur.

In an effort to further the SEC's goal to make these disclosures and others readily available to investors, the Proposed Rules will require posting of Exchange Act reports on company web sites at the same time as they are filed with the SEC.

Required Disclosure of Accounting Policies

Under the Proposed Rules, disclosure of critical accounting policies will be required on annual reports. In the Management's Discussion and Analysis of Financial Condition and Results of Operations section, the company must provide "full explanations, in clear and understandable format and language, of their critical accounting policies, the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions."

The SEC intends to adopt new rules on all these matters as quickly as possible after issuing proposing releases and soliciting public comment.

For more information, contact Steven Sonberg by e-mail at ssonberg@hklaw.com or Richard Montes de Oca at rmontes@hklaw.com