SEC to Propose New Corporate Disclosure Rules

March 27, 2002 Advisory

The day after five of its former chairmen testified to the Senate Banking Committee urging new accounting rules to prevent future corporate disasters such as the one that bankrupted Enron, the Securities and Exchange Commission announced proposed changes in corporate disclosure rules as "the first in a series of steps designed to improve the financial reporting and disclosure system." See SEC Press Release 2002-22 (February 13, 2002). The new rules would require public companies to make many SEC filings more quickly and to list clearly the assumptions that underlie their accounting practices.

Specifically, the SEC intends to propose rules that will:

Accelerate the filing by companies of their quarterly and annual reports. The filing of Forms 10-K and 10-Q would be required, respectively, within 60 days after the filing company's fiscal year end (rather than within 90 days) and within 30 days after the end of the filing company's first three quarters (rather than within 45 days).

Require disclosure of critical accounting policies in annual report MD&A. In a Cautionary Advice Release issued on December 12, 2001 (See SEC Release No. 33-8040), the SEC defined "critical accounting policies" as those accounting policies important to the portrayal of a company's condition and results, and requiring management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The proposed changes to rules for Management's Discussion and Analysis of Financial Condition and Results of Operations may require full explanations of critical policies in clear and understandable format and language, with discussion of judgments and uncertainties affecting application of those policies and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

Accelerate reporting by companies of insider transactions. The SEC will support legislation necessary to "dramatically" shorten the period for disclosure of trading activities by company officers, directors and beneficial owners of 10% of the company's stock. Under current rules, insiders are required to file such reports by the 10th day of the month after a transaction. In the meantime, the SEC intends to propose rules requiring that companies disclose on a current basis significant transactions in company stock by officers and directors.

In addition, the Commission intends to propose changes to Exchange Act Rule 16b-3, which currently allows officers and directors who sell stock back to their company to delay reporting until 45 days after the end of the fiscal year in which such transaction took place. The proposed change would require companies to report on a current basis any transactions involving securities of the company entered into with any of its officers or directors.

Expand the type of information that must be reported on Form 8-K. The SEC intends to expand widely the list of events requiring companies to file a current report on Form 8-K. Some of the items the SEC is evaluating for inclusion as a reportable event include:

· Changes in rating agency decisions;

· Transactions in company securities with executive officers and directors;

· Events of default that could accelerate direct or contingent obligations;

· Issuing of equity securities not included in a prospectus filed by the company with the SEC;

· Waivers of corporate ethics or 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;

· 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;

· Entering into a definitive agreement that is material to the company;

· Any loss or gain of a material customer or contract;

· Any material write-off, restructuring or impairment;

· 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.

The SEC further intends to propose that reports on Form 8-K be filed no later than the second business day (and for certain events, possibly no later than one business day) following occurrence of an 8-K event. The current filing period, depending on the event, is within five or 15 business days following the occurrence.

Require simultaneous posting of Exchange Act filings on company web sites. The SEC intends to propose rules requiring companies to make their Exchange Act reports available on their Internet web sites at the same time as they are filed with the SEC.

While the SEC has yet to release formal proposals for the new rules, and the process of public comment can take several months, it is possible that the new rules will be in effect by fall 2002. The Commission intends to "adopt the new rules as quickly as possible."

If you have any questions regarding this Client Advisory, or about our corporate or securities law practice, please do not hesitate to contact Mike Grundei (203.363.7630/[email protected]), Terry Jones (203.498.4324/[email protected]), Norm Fleming (203.498.4328 /[email protected] or Jim Menna (203.498.4343/[email protected]).