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Course Code: 736796
SECR GS-0419-0A
Revised: December 2019
Chapter 1
The SEC and the Laws It Administers
Learning objectives
Identify the major securities laws.
Recall how the SEC is organized.
Identify the relationship between the SEC and the accounting profession.
Notice to readers: Links are included throughout the text to direct participants to relevant websites. If these websites do not appear when typed into a web browser, copy the links into a search engine to be redirected to the proper web page.
The securities statutes
The Securities Act of 1933 (Securities Act or the 1933 Act) and the Securities Exchange Act of 1934 (Exchange Act or the 1934 Act) are the principal securities statutes. In addition, there are other principal acts that are associated with the securities: The Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Investor Protection Act of 1970, and the Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley). The Dodd-Frank Act, the Jumpstart Our Business Startups (JOBS) Act, and the Fixing America’s Surface Transportation (FAST) Act affected the securities statutes but are not administered by the SEC. The SEC also serves as an adviser to the United States district courts in connection with Federal Bankruptcy Act reorganization proceedings involving registrants.
The primary objectives of these securities statutes (and of the SEC’s duties under the Bankruptcy Reform Act of 1978) are summarized as follows.
Securities Act of 1933
The Securities Act of 1933 defines security as
Any note, stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, reorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas or other mineral rights, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
The Securities Act, sometimes referred to as the “truth in securities” act, has two primary objectives. First, it requires an issuer offering securities to the public in interstate commerce or through the mail, unless specifically exempted, to file a registration statement with the SEC containing financial and other information about the issuer and the offering. Registration of securities, however, does not imply approval of the issue by the SEC or insure investors against loss, but rather serves to provide consistent information investors may use to make informed investment decisions.
Second, the Securities Act contains anti-fraud provisions that apply to the sale of securities, whether or not registered, and imposes civil liabilities and criminal penalties on persons involved with registration statements containing false and/or misleading information.
Common Securities Act forms are discussed in a later chapter.
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 (1934 Act or Exchange Act), as amended, is primarily concerned with the trading and ongoing reporting related to registered securities. Section 12 of the Exchange Act contains registration requirements for companies (1) whose securities are listed or traded on a national securities exchange or in certain over-the-counter markets [Section 12(b)] or (2) whose assets are greater than $10 million and that have a class of equity securities (i) held by at least 2,000 persons at year-end, or (ii) held by more than 500 persons who are not accredited investors (nonpublic banks and bank holding companies are not subject to the 500 unaccredited investor threshold) [Section 12(g)].
Companies that seek to have their securities listed and registered for public trading on an exchange, including the over-the-counter bulletin board (OTCBB), must file a registration application with the exchange and a registration statement with the SEC. Following the registration of their securities, the companies must file annual and other periodic reports to keep current the information contained in the original filing. The Exchange Act also requires the filing of other annual and periodic reports with the SEC for such companies.
The 1934 Act requires the SEC to perform the following functions:
Regulate stock exchanges, brokers, and company insiders. Control proxy solicitation, tender offers, and going-private transactions.
Control amounts of credit used in the trading markets.
Regulate transfer agents, clearing agencies, and brokers who deal exclusively in municipal securities (this element was added by the Securities Acts Amendments of 1975).
The 1934 Act also provides for
restrictions on the activities of insiders and the reporting of their security holdings and holdings changes; reporting of security holdings and changes by others; compliance with the record-keeping and internal control provisions of the Foreign Corrupt Practices Act; the prohibition of manipulation and deceptive devices in the offer, sale, or purchase of securities; and the institution of civil and criminal liabilities for violation of these prohibitions and other provisions of the 1934 Act.
The Exchange Act is not an update of the Securities Act. The Securities Act deals with the initial offering of securities; the Exchange Act is concerned with the subsequent trading in those securities.
Most commonly used Exchange Act forms
The most commonly used Exchange Act (1934 Act) forms include those for periodic and current reporting, notification of late filing, and termination of registration as follows:
Form Purpose
Form 8-K
Form 10-K
Form 10-Q
Form 11-K
Form 12b-25
Form 15
Current reports
Annual and transition reports
Quarterly and transition reports
Annual reports of employee stock purchase, savings, and similar plans
Notification of late filing
Certification of termination of registration of a class of securities under Section 12(g) or notice of suspension of duty to file reports
Registration of securities under the 1934 Act:
Form Purpose
Form 8-A
Form 10
Registration of certain classes of securities
General form for registration of securities
Proxy, tender offers, and going-private schedules:
Form Purpose
Schedule 14A
Schedule 14C
Schedule TO
Schedule 13E-3
To report proxy statement information to shareholders
To report information statement data to shareholders when no proxy is solicited by management
To report the making of a tender offer for any class of equity securities by the registrant or by any person other than the registrant who if after consummation would become the beneficial owner of more than 5 percent of the securities
To report a going-private transaction by the registrant
Periodic reporting and registration of smaller reporting companies are covered in a later chapter.
A smaller reporting company is defined as an issuer that had a public float) of less than $250 million as of the last business day of its most recently completed second fiscal quarter or an issuer with less than
$100 million of revenues in its most recent fiscal year that has either no public float or less than $700 million of public float. Public float is defined as the aggregate worldwide market value of the voting and non-voting common equity held by a company’s non-affiliates. The smaller reporting company rules allow scaled disclosure requirements for smaller reporting companies. (See Regulation S-X, Article 8, for the financial rules, and Regulation S-K for the nonfinancial rules.)
Smaller reporting companies use the same forms as all other companies for the purposes indicated previously because the scaled disclosures are elective.
Reports required of officers, directors, and principal stockholders pursuant to Section 16 of the Exchange Act:
Form Purpose
Form 3
Form 4
Form 5
Initial statement of beneficial ownership of securities
Statement of changes in beneficial ownership of securities
Annual statement of beneficial ownership of securities
Current and periodic reporting and registration of foreign registrants:
Form Purpose
Form 6-K
Form 20-F
Current report of foreign issuers
Registration of securities of foreign private issuers and annual and transition reports
Trust Indenture Act of 1939
This act is designed to safeguard the interests of purchasers of publicly offered debt securities issued under trust indentures. Its provisions require that certain clauses be eliminated and that certain protective provisions be included in such indentures. The act also requires the indenture trustee, who is a representative of the debt holders, to be “independent,” and proscribes certain relationships that might conflict with the proper exercise of the trustee’s duties.
Investment Company Act of 1940
This act requires investment companies (companies, including mutual funds, engaged primarily in investing, reinvesting, and trading in securities) to register with the SEC. It also subjects their activities to regulation in accordance with prescribed standards. Various transactions of investment companies, including transactions with affiliated interests, are prohibited unless exempted by the SEC.
Investment Advisers Act of 1940
Persons or firms who engage in the business of advising others, for compensation, about their security transactions must register with the SEC. Their activities in the conduct of such business are subject to standards of the act, which make unlawful certain fraudulent and deceitful practices and which require, among other things, disclosure of any interests such advisers may have in transactions executed for clients. The act also gives the SEC rulemaking powers concerning fraudulent and other activities of investment advisers.
Securities Investor Protection Act of 1970
This act created the Securities Investor Protection Corporation (SIPC), a nonprofit organization composed of all brokers and dealers registered under the 1934 Act, and members of a national securities exchange other than certain brokers and dealers.
Under this act, the SIPC must submit to the SEC an annual report on its operations that contains audited financial statements. The SEC then must submit this report with its comments, if any, to the President and Congress.
Bankruptcy Reform Act of 1978
The Bankruptcy Reform Act of 1978 provides, among other things, that the SEC shall furnish independent and expert advice to the United States district courts regarding proposed plans of reorganization of debtor corporations. Although the act does not specifically require the services of an independent public accountant, parties to the proceedings, such as the trustee or trustee’s counsel, usually hire accountants to assist them.
In order to see that the rights of public investors are adequately protected, the SEC files briefs in the bankruptcy and other courts on selected issues involving reorganization cases that have a significant impact on such rights.
The staff of the SEC also reviews the adequacy of disclosure in the disclosure statement (combination proxy and offering statement) used in soliciting acceptances of a plan of reorganization, when the company involved is publicly held or likely to become publicly held as a result of the reorganization. Usually, the staff’s comments are accepted but, if they are not, the SEC will object to a disclosure statement in the bankruptcy court.
The Public Company Accounting Reform and Investor Protection Act of 2002
The Public Company Accounting Reform and Investor Protection Act of 2002 (Accounting Reform Act of 2002) is also known as the Sarbanes-Oxley Act of 2002 (the SOX Act). The SOX Act established the Public Company Accounting Oversight Board (PCAOB) to oversee public accounting firms; established new rules and sanctions for public accounting firms that audit public companies; and clearly placed the responsibility for public company financial statements with corporate officers. It gave the SEC general oversight over the PCAOB and ultimate responsibility for enforcing the provisions of the act.
The act fundamentally changed how audit committees, management, and auditors carry out their respective responsibilities and interact with each other. It laid out specific requirements for each of these parties with regard to corporate responsibilities, auditor regulation and independence, and financial reporting. It also provided for enhanced criminal penalties for corporate fraud.
The act represented a new era of regulation that followed the accounting irregularities perpetrated at Enron, WorldCom, and several other large, publicly held companies. Because most of these scandals were not uncovered by (and, in some cases, were facilitated by) top management and the company’s external auditors, Congress concluded that confidence could best be restored through greater government involvement.
The scope of the SOX Act is very broad. Public companies subject to the SOX Act are defined as those that have securities registered under Section 12 of the Securities Exchange Act of 1934; are required to file reports under Section 15(d) of the 1934 Act; or file or have filed a registration statement under the Securities Act of 1933 that is not yet effective. Additionally, public accounting firms subject to the act are not limited to domestic firms. Any foreign public accounting firm that prepares or furnishes an audit report with respect to an issuer in the United States is subject to the SOX Act, including the rules of the PCAOB.
The PCAOB is required by the SOX Act to have five financially literate members (two current or former certified public accountants and three non-CPAs). Members, appointed by the SEC, may not be connected with any public accounting firm other than as retired members receiving fixed continuing payments and in general may not be employed or engaged in any other professional or business activity. The PCAOB, as well as the accounting standards board (FASB), are funded through fees collected from public companies, which are assessed based on a percentage of each company’s market capitalization to total market capitalization for all public companies.
The PCAOB’s duties are to establish or adopt standards (for example, auditing, quality control, ethics, independence) related to the preparation of audit reports; conduct inspections of registered accounting firms; and conduct investigation and disciplinary proceedings, as necessary. The PCAOB has the authority, subject to SEC review, to impose sanctions on accounting firms and individual professionals.
Other key provisions of the SOX Act, including the amendments introduced by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act), are as follows:
Provisions affecting public companies and their officers and directors
– Section 404(a) requires management to report on the effectiveness of the company’s internal control over financial reporting (ICFR) as of the end of every fiscal year.
– Section 404(b) requires the independent registered accountant to report on the effectiveness of the accelerated filer’s ICFR as of the end of every fiscal year. Section 404(c), which was added by the Dodd-Frank Act, provided a permanent exemption to non-accelerated filers from the ICFR auditor attestation requirement.
– Requires CEO/CFO certifications of periodic reports filed with the SEC.
– Bans personal loans to officers and directors (existing loans were grandfathered).
– Limits trading by insiders during pension fund blackout periods.
– Accelerates the reporting of transactions involving company securities by officers, directors, and 10% owners to two business days after the transaction.
– Requires disclosures relating to material adjustments, off-balance-sheet transactions, and pro forma (non-GAAP) information.
– Requires disclosure regarding a company’s code of ethics for its senior financial officers.
– Protects whistleblowers and gives them access to audit committees.
– Stiffens criminal penalties for securities law violations.
Provisions affecting audit committees of public companies
– Audit committees are responsible for the appointment, compensation, and oversight of independent auditors.
– Audit committees must have procedures in place for receiving and reviewing complaints about accounting, internal controls, or auditing matters.
– Independence standards defined for audit committee members.
– Companies must disclose whether at least one member of the audit committee is a “financial expert.”
Provisions affecting independent auditors
– Auditors are subject to oversight and review by PCAOB.
– Non-audit services provided by accounting firms to their public company audit clients are restricted.
– Auditors must communicate to the audit committee information regarding the company’s critical accounting policies.
– Partner rotation requirements updated.
– Employment of audit team members by public company audit clients restricted.
– Record retention requirements updated.
– Audit committees must pre-approve the audit and permitted non-audit services.
A summary of the major sections of the Accounting Reform Act organized by title follows.
Title III — Corporate responsibility
Section 301 required that the exchanges adopt rules that would require public company audit committees to be composed of independent members of the board. The audit committee is directly responsible for the appointment, compensation, and oversight of the work of any employed registered public accounting firm. The committee is also responsible for establishing procedures for the receipt, retention, and treatments of complaints received regarding accounting, internal controls, and auditing.
Section 302 required the SEC to issue rules mandating that CEOs and CFOs provide certifications in annual and quarterly reports regarding the information included in such reports.
Section 303 required the SEC to issue rules making it unlawful for officers and directors to unduly influence, coerce, manipulate, or mislead independent accountants engaged in the performance of an audit of the financial statements for purposes of rendering those financial statements misleading.
Section 304 required that if a company restates its financial statements due to a material noncompliance with financial reporting requirements as a result of misconduct, any bonuses and other incentive-based or equity-based compensation received by the chief executive officer and chief financial officer during the 12 months following the filing of the noncompliant document, as well as profits realized from the sale of securities during that period, must be returned to the company.
Section 306 barred executive officers and directors from trading company securities during any period when a majority of plan participants are prohibited from trading company securities held in company sponsored benefit plans (blackout period). The SEC issued rules clarifying the scope and operation of Section 306 through the adoption of Regulation Blackout Trading Restriction (BTR).
Section 307 required the SEC to issue rules requiring attorneys practicing before the SEC to report evidence of a material fraud to the chief legal counsel or chief executive officer of the company. If appropriate action is not taken, the attorney must report the fraud to the board of directors.
Title IV — Enhanced financial disclosures
Section 401 required that the financial statements reflect all material correcting adjustments identified by the independent auditor and all material off-balance-sheet transactions and other relationships with unconsolidated entities. In addition, all pro forma financial information must not be misleading.
Section 402, subject to certain limited exceptions, made it unlawful for a company to extend credit to its directors and executive officers; existing loans were grandfathered provided they are not materially modified or renewed.
Section 403 required changes in beneficial ownership (from sales, purchases, or otherwise) of directors, officers, and greater than 10% shareholders (beneficial owners) to be reported to the SEC within 2 business days of the change. Similar reports must be filed within 10 days after an individual becomes an officer, director, or beneficial owner.
Under the final rules implementing the act’s Section 404, management’s annual internal control report is required to include the following:
A statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the company
A statement identifying the framework used by management to evaluate the effectiveness of this internal control
Management’s assessment of the effectiveness of this internal control as of the end of the company’s most recent fiscal year
A statement that its independent auditor has issued an attestation report on management’s assessment
Under the rules, management must disclose any material weakness and is unable to conclude that the company’s internal control over financial reporting is effective if there are one or more material weaknesses in such control. Furthermore, the framework on which management’s evaluation is based is required to be a suitable, recognized control framework that is established by a body or group that has followed due-process procedures, including the broad distribution of the framework for public comment. The SEC also adopted amendments requiring companies to perform quarterly evaluations of changes that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.
Section 404(b) of the SOX Act requires auditor attestation on a company’s ICFR. Non-accelerated filers were exempted from the auditor attestation requirement by Section 404(c) of the SOX Act, added by the Dodd-Frank Act. The Dodd-Frank Act also tasked the SEC with conducting a study regarding how the SEC can reduce the burden of the ICFR auditor attestation requirement on smaller accelerated filers with public floats between $75 million to $250 million. In April 2011, the SEC published the study that concluded that the ICFR auditor attestation requirement should be maintained in its current form for all accelerated filers.
In April 2012, the Jumpstart Our Business Startups Act created a new category of filers referred to as “emerging growth companies” (as further described in the following text). Emerging growth companies are also temporarily exempted from the auditor attestation requirement.
The Section 404 compliance deadline for newly public issuers to provide management’s report on internal control over financial reporting and to provide an auditor’s report on internal control is one year after the filing of the newly public issuer’s first Form 10-K (unless the issuer is a non-accelerated filer or emerging growth company as noted previously).
Section 406 of the SOX Act required the SEC to issue final rules requiring a public company to disclose whether it has adopted a code of ethics for its senior financial officers and if not, to disclose the underlying reasons. Under the SOX Act, a code of ethics is defined as standards reasonably necessary to promote honest and ethical conduct; accurate and timely disclosures in periodic reports; and compliance with governmental rules and regulations. Any change in or waiver of the code must immediately be disclosed by either filing a Form 8-K or posting the waiver or change on the company’s website.
Section 407 of the SOX Act required issuers to disclose whether at least one member of the audit committee is a “financial expert.”
Section 409 required issuers to disclose information on material changes in the financial condition or operations of the issuer on a “rapid or current” basis.
Title V — Analyst conflict of interest
Section 501 required the SEC to issue rules to address conflicts of interest that can arise when securities analysts recommend equity securities in research reports and public appearances. In 2003, the SEC approved rules submitted by the New York Stock Exchange and the National Association of Securities Dealers regarding research analyst rules that fulfill the requirements of Section 501.
Title VIII — Corporate and criminal fraud accountability
Section 802 enhanced criminal penalties for altering documents. Any individual who knowingly alters, destroys, or falsifies a record in an attempt to interfere with or influence a federal investigation or bankruptcy proceeding could face fines and/or up to 20 years imprisonment. Section 1102 provides the same penalties for tampering with a record or otherwise impeding an official proceeding.
Section 802 also requires independent accountants to retain certain audit and review working papers for five years after the end of the period when the accountant audits or reviews the financial statements.
Upon signing of the SOX Act, Section 804 extended the statute of limitations on securities fraud claims to the earlier of 5 years from the date of the fraud or 2 years after the fraud was discovered. Maximum prison terms have been increased to 25 years for securities fraud and 20 years for wire and mail fraud.
Title IX — White-collar crime penalty enhancements
Section 903 extended the potential jail sentences for mail and wire fraud from 5 years to 20. Section 905 required the U.S. Sentencing Commission to review and amend the Federal Sentencing guidelines relating to white-collar offenses to reflect the serious nature of these acts. The same is required with respect to the sentencing guidelines for corporate fraud offenses, per Section 1104.
Section 906 of the SOX Act required CEOs and CFOs to certify each periodic report containing financial statements. The certification must state that the periodic report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act and that the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.
Maximum penalties for knowing violations of this section of the act are fines of up to $1 million and/or imprisonment for up to 10 years; willful violations carry fines of up to $5 million and/or imprisonment of up to 20 years.
Title XI — Corporate fraud accountability
Section 1103 authorized the SEC to temporarily freeze extraordinary payments to directors, officers, partners, controlling persons, and agents of employees in connection with investigations of possible violations of securities laws.
Section 1105 allowed the SEC in any cease-and-desist proceedings to bar individuals who have violated SEC rules regarding the sale of securities under the Exchange Act or Securities Act from serving as director or officer of a public company.
Section 1106 increased criminal penalties under the Exchange Act from up to $1 million and 10 years imprisonment to $5 million and 20 years imprisonment.
Note: The SOX Act can be accessed on the SEC’s website
Securities offering reform
In 2005, the SEC completed a multiyear effort to modernize the securities offering process under the Securities Act of 1933. The changes were designed to encourage communications to investors during an offering. They also changed the SEC’s approach to regulating offerings by placing greater reliance on reports filed periodically under the 1934 Act, and placed the SEC on the path of company-based rather than document-based filings. The SEC believes that greater reliance on 1934 Act reports is appropriate in view of the enhanced regulation and SEC staff scrutiny of these reports provided by the SOX Act.
The Securities Offering Reform Act primarily focused on three aspects of the offering process: (1) communications during registered securities offerings, (2) the registration process, and (3) the delivery of final prospectuses to investors. The act required certain additional disclosures in annual reports filed with the SEC. The rules are discussed in detail in a later chapter.
Small and emerging companies
Smaller reporting companies are defined as companies with less than $250 million of public float or companies with less than $100 million of revenues in most recent fiscal year that has either no public float or less than $700 million of public float. Public float is defined as the portion of a company’s outstanding shares that is in the hands of public investors, as opposed to company officials or other insiders. The financial and nonfinancial reporting requirements for smaller reporting companies are included in Regulation S-X and Regulation S-K, respectively. Delayed primary shelf offerings are available to smaller reporting companies.
To facilitate the SEC’s consideration of rule changes that would reduce the regulatory burden on small business capital formation, the SEC formed an Advisory Committee on Small and Emerging Companies in late 2011, to operate for a term of two years. The advisory committee’s key objective is to provide advice and recommendations to the SEC regarding capital formation by small businesses and small publicly traded companies. In 2012, the advisory committee made a number of recommendations that Congress subsequently implemented by reflecting them in the JOBS Act. In October 2013 and again in September 2015, the SEC renewed the advisory committee’s term for another two years. In December 2016, Congress added a provision to the Securities Exchange Act that establishes a similar advisory committee on a permanent basis.
The advisory committee has made recommendations to the SEC in addition to those discussed previously and has discussed other options for capital formation for emerging companies. Most notably, these recommendations and discussions included the following:
A recommendation to raise the public float threshold for smaller reporting companies from $75 million to $250 million
A recommendation to exempt smaller reporting companies from XBRL tagging
A recommendation to allow all smaller reporting companies the benefits available to emerging growth companies under Title I of the JOBS Act (which includes relief from the requirement in Section 404(b) of the Sarbanes-Oxley Act for auditor attestation on internal control over financial reporting)
Recommendations related to the proposed amendments to Regulation D
Recommendations related to the accredited investor definition
Recommendations related to board diversity disclosures
Discussion related to secondary market liquidity and trading
The advisory committee issued a final report to the SEC in September 2017 to memorialize its recommendations over the previous six years. This report can be found at www.sec.gov/info/smallbus/acsec/acsec-final-report-2017-09.pdf
Other information regarding the Advisory Committee’s activities can be found at www.sec.gov/spotlight/advisory-committee-on-small-and-emerging-companies.shtml
In 2016, the SEC proposed rules that would increase the financial thresholds in the smaller reporting company definition. Under the proposal, a company with less than $250 million of public float would qualify as a smaller reporting company (consistent with the advisory committee’s recommendation). The final rules were adopted in June 2018 and became effective in September 2018.
SEC initiatives under the Dodd-Frank Act
The Dodd-Frank Act was enacted on July 21, 2010, in an effort to promote financial reform and protect the United States against certain of the risks that led to the financial crisis. Congress delegated portions of the rulemaking legislated by the Dodd-Frank Act to the SEC, including over 100 rules and more than 20 studies. Because of the enormity of this effort and the short time during which it was supposed to be completed, the SEC used new approaches to elicit input and communicate its plans. To encourage public comment in the rulemaking process, the SEC created email boxes for each topic so individuals and organizations could provide input to the SEC even before rules are proposed (at www.sec.gov/spotlight/regreformcomments.shtml). To help communicate the SEC’s plans for implementing the act, the SEC created a section on its website that provides its rulemaking schedule (at www.sec.gov/spotlight/dodd-frank.shtml). This section also contains links to completed actions.
During recent years, the SEC devoted much of its attention to completing rulemaking required by the Dodd-Frank Act and made significant progress toward completing some of the required tasks. The following section summarizes the SEC rulemaking and studies mandated by the Dodd-Frank Act that are of greatest interest to registrants.
Exemption from auditor reporting on ICFR for non-accelerated filers
The Dodd-Frank Act exempted non-accelerated filers from the requirement to have their auditors opine on the effectiveness of their ICFR. The SEC then adopted rule changes to conform its rules to the DoddFrank Act.
The SEC’s rulemaking also made the following changes:
Non-accelerated filers’ management reports on ICFR are now considered filed, not furnished, under the Securities Exchange Act of 1934. This subjects the reports to a higher level of liability.
Non-accelerated filers are no longer required to provide a statement within management’s report that an auditors’ report on ICFR has not been provided.
Relief from the ICFR audit requirement is available to non-accelerated filers — not to filers whose public float is less than $75 million. Under Exchange Act Rule 12b-2, an accelerated filer retains its accelerated status until its worldwide public float decreases below $50 million as of the end of its second fiscal quarter. Consequently, an accelerated filer with public float between $50 million and $75 million as of the end of its second fiscal quarter continues to be required to file on an accelerated timetable and have its auditors opine on its ICFR.
Newly public issuers continue to be the only filers that are not required to provide management reports on the effectiveness of ICFR. Item 308 of Regulation S-K provides relief to these registrants in their first annual report, but they must provide management’s report on ICFR (and an auditors’ attestation report if they are accelerated filers) beginning with their second annual report. If newly public companies take advantage of this relief in their first annual report, they must state that management’s and the auditors’ reports were not provided due to the first-year exemption allowed by the rules.
Study of internal control over financial reporting
As discussed previously, the Dodd-Frank Act exempted non-accelerated filers from the requirement to have their auditors opine on the effectiveness of their ICFR. The Dodd-Frank Act also requires the SEC to study how it can reduce the burden of the ICFR auditor attestation requirement on small accelerated filers with public floats between $75 million and $250 million and whether reducing the compliance burden or completely exempting such companies from the requirement would encourage companies undertaking initial public offerings to list on exchanges in the U.S.
The SEC staff released the study regarding how the SEC can reduce the burden of the internal control over financial reporting auditor attestation requirement on small accelerated filers. A summary of the staff’s conclusions follows:
The costs of ICFR auditor attestation have declined since the SEC first implemented the ICFR audit requirement, particularly in response to the 2007 reforms.1 Investors generally view the auditor’s attestation on ICFR as beneficial. Financial reporting is more reliable when the auditor is involved with ICFR assessments. There is not conclusive evidence linking the requirements of ICFR auditor attestation to listing decisions of the issuers that were studied.
1 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 AS 2201, 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.
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 would possibly be detrimental to the effectiveness of audits of ICFR and would not maintain investor protections provided by ICFR audits.
After considering the information gathered from internal and external sources, the staff made the following two recommendations:
1. Maintain existing investor protections of the ICFR auditor attestation requirement for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers.
2. Encourage activities, such as the following, that have the potential to further improve both effectiveness and efficiency of the ICFR audit:
a. PCAOB to publish its observations on top-down, risk-based audits of ICFR developed from their inspections.
b. COSO to allow constituents to provide comments on the internal control framework update project on improvements to designing, implementing, and assessing internal controls.
As a result of the study, the current ICFR auditor attestation requirements remained unchanged. However, in April 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. Among other provisions, the JOBS Act provided a temporary exemption from the ICFR auditor attestation requirement for a new category of filers called “emerging growth companies” for a period of up to five years. The JOBS Act is discussed in further detail in the following text.
On May 9, 2019, the SEC proposed to amend the definitions of an accelerated and large accelerated filer. As proposed, smaller reporting companies with less than $100 million in annual revenue would not be required to obtain an audit of their internal control over financial reporting. The proposed amendments would not change other key protections from the Sarbanes-Oxley Act of 2002, such as independent audit committee requirements; CEO and CFO certifications of financial reports; or the requirement that companies continue to establish, maintain, and assess the effectiveness of their ICFR. The proposed changes are intended to reduce compliance costs and promote capital formation for smaller reporting issuers.
The initial qualification thresholds for accelerated and large accelerated filer status based on public float would remain the same (i.e., $75 million or more but less than $700 million in public float for an accelerated filer and more than $700 million in public float for a large accelerated filer). The public float transition thresholds for exiting accelerated and large accelerated filer status would be 80% of the initial qualification thresholds. The proposal is subject to a 60-day public comment period after it is published in the Federal Register.
Whistleblower program
The SEC adopted the whistleblower rules mandated by Section 922 of the Dodd-Frank Act in 2011. The rules implement the act’s requirement that the SEC pay an award to a whistleblower that 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% 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 highquality information to facilitate the effectiveness and efficiency of the SEC’s enforcement program.”
A controversial aspect of the rules 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. However, the SEC Chairman 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.
Say-on-pay
The initiative to allow shareholders to make advisory votes on executive compensation, termed “say-onpay,” began developing in 2007. In that year, groups of institutional investors promoted the say-on-pay vote, and shareholder resolutions were included in the proxy statements of approximately 50 registrants. The number of such shareholder resolutions grew to over 90 in 2008. The SEC first formalized the initiative when it finalized rules that require Troubled Asset Relief Program (TARP) recipients to have shareholder advisory votes on executive compensation.
In January 2011, the SEC adopted rules required by Section 951 of the act that require the following shareholder advisory (non-binding) votes:
Say-on-pay. Shareholders vote on executive compensation when registrants solicit proxies for the election of directors.
Say-on-frequency. Shareholders vote, at least once every six years, on the desired frequency of the say-on-pay vote (that is, whether it’s held every year, every other year, or once every three years). Golden parachute arrangements. Shareholders vote on 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 votes became effective in 2011. The rules do not require an advisory vote on director compensation. Under authority granted by the act, the SEC decided to temporarily exempt smaller reporting companies from the say-on-pay rules until annual meetings occurring on or after January 21, 2013. Additionally, the JOBS Act of 2012 provides temporary exemption from the say-on-pay rules for the new category of filers called “emerging growth companies.”
The rules require public companies subject to the SEC’s proxy rules2 to provide their shareholders with an advisory vote on executive compensation every year, every other year, or once every three years;3 provide their shareholders, at least once every six years, with an advisory vote on the desired frequency of the vote on executive compensation;
2 Foreign private issuers are not subject to the SEC’s proxy rules and therefore are not subject to these new rules.
3 The instruction to Rule 14a-21(a) provides the following nonexclusive example of a resolution that would satisfy the applicable requirements: “RESOLVED, that the compensation paid to the company’s named executive officers as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.”
disclose the outcome of the shareholder say-on-pay and 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; otherwise – amend the initial Item 5.07 Form 8-K to disclose how frequently the registrant 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; and – disclose in the Compensation Discussion and Analysis whether, and if so, how the registrant has considered the results of previous say-on-pay votes.4
Registrants are required to disclose golden parachute arrangements for both the acquiring issuer and the target issuer under new Item 402(t) of Regulation S-K. The disclosure is required in any proxy or consent solicitation material for a meeting “at which shareholders are asked to approve an acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer.” Issuers are required to provide tabular and narrative disclosure of the aggregate total that may be paid or become payable to named executive officers upon such a transaction, the conditions upon which it may be paid or become payable, and the following individual elements of the total compensation:
Cash severance payments
Accelerated stock awards, in-the-money option awards for which vesting would be accelerated, and payments in cancellation of stock and option awards
Pension and nonqualified deferred compensation benefit enhancements
Perquisites and other personal benefits and health and welfare benefits
Tax reimbursements
Other compensation explained in footnote narrative disclosure
If an issuer has previously disclosed golden parachute arrangements in compliance with Item 402(t) of Regulation S-K that were subject to a shareholder advisory vote, the issuer will not be required to include in the merger proxy a separate shareholder vote on the golden parachute compensation. However, if no prior shareholder vote has been obtained on the golden parachute arrangements, the issuer is required to solicit shareholder votes on the golden parachute arrangements within the proxy or consent solicitation materials for the shareholder meeting at which the sale/merger decision will be made. Like the say-onpay vote, the shareholder vote on golden parachute arrangements is advisory and not binding on the board of directors of an issuer.
The golden parachute arrangement shareholder advisory votes became required in proxy statements in 2011. Unlike the say-on-pay rules, smaller reporting companies did not receive a temporary exemption, and are required to implement the golden parachute rules at the same time as all other registrants. In 2011, the SEC staff published a small entity compliance guide on shareholder approval of executive compensation and golden parachute compensation to assist companies in implementing the new disclosure requirements required by these rules (available at www.sec.gov/rules/final/2011/33-9178secg.htm). Subsequently, in April 2012, the JOBS Act exempted emerging growth companies from the golden parachute arrangement shareholder advisory votes.
4 Smaller reporting companies are not required to provide a Compensation Discussion and Analysis and therefore are not required to provide this disclosure.
Investment manager reporting of its proxy votes on executive compensation
In 2010, the SEC proposed rules that would require certain institutional investment managers to disclose how they voted on executive compensation (say-on-pay and frequency of say-on-pay) and golden parachute arrangements. Institutional investment managers would be required to report their votes on executive compensation and golden parachute arrangements at least annually on amended Form N-PX under the proposed rules. The SEC has not finalized these rules.
Corporate governance
In 2012, the SEC finalized a new rule addressing the structure and activities of compensation committees, as mandated by Section 952 of the Dodd-Frank Act. New Rule 10C-1 implements the act’s requirement for the SEC to direct the national securities exchanges to adopt listing standards related to the compensation committees of an issuer’s board of directors as well as its compensation advisers. In particular, Rule 10C-1 directs the listing standards of the exchanges to require the following:
Each member of an issuer’s compensation committee5 must be a member of the board of directors and must be independent.6
Each compensation committee must have the authority to retain or obtain the advice of a compensation adviser.
Each compensation committee must take into account specific factors identified by the SEC that may affect the independence of the compensation adviser before hiring a compensation adviser. Each compensation committee is responsible for the appointment, compensation, and work of the compensation adviser.
Each issuer must provide appropriate funding for the payment of reasonable compensation to a compensation adviser appointed by the compensation committee.
A listed company must meet these standards in order for its shares to continue trading on the exchange. In January 2013, the SEC approved the amendments proposed by the exchanges and required by Rule 10C-1. The standards became effective on July 1, 2013, for the NYSE and the NASDAQ.
The rule also amended the SEC’s proxy disclosure rules. The amendments revised Item 407 of Regulation S-K to require the following additional disclosures in an issuer’s proxy or solicitation material for annual meetings at which directors are elected occurring on or after January 1, 2013:
Whether the company retained or obtained the advice of a compensation adviser
Whether the compensation adviser’s work has raised any conflict of interest
The nature of any identified conflict of interest and how that conflict is being addressed (if applicable)
The listing standards requirements in Rule 10C-1 do not apply to smaller reporting companies. In addition, because Rule 10C-1 applies only to national securities exchanges and associations, the listing
5 The rule applies to any committee of the board that performs functions typically performed by a compensation committee (including executive compensation oversight), regardless of whether the committee is formally designated as a compensation committee.
6 Limited partnerships, companies in bankruptcy proceedings, registered open-end management investment companies, and foreign private issuers who disclose why they do not have an independent compensation committee are exempt from the independence requirement.
standards do not apply to companies whose securities are quoted on the OTC Bulletin Board and the OTC Markets Group (pink sheets). In contrast, the revisions to Item 407 of Regulation S-K apply to all companies subject to the SEC’s proxy rules, including nonlisted issuers and smaller reporting companies.
The Dodd-Frank Act also requires the SEC to adopt other rules regarding executive compensation and the manner in which a corporation is governed, as follows:
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 fiveyear period (termed pay-for-performance) and the ratio of the CEO’s total compensation to the median total compensation of all other company employees. In August 2015, the SEC adopted a rule that requires issuers to disclose (a) the median annual total compensation of all employees except the chief executive officer; (b) the annual total compensation of the CEO; and (c) the ratio of the median annual total compensation of all employees to the annual total compensation of the CEO. The rule is discussed in detail in a later chapter. In April 2015, the SEC proposed a rule related to payfor-performance disclosures that would require disclosure of the relationship between executive compensation actually paid and the company’s financial performance, including (1) a tabular presentation of compensation actually paid to named executive officers and the total shareholder return of the company and its peers for each of the last five fiscal years; and (2) a clear description of the relationship between compensation actually paid and the company’s total shareholder return as well as between the company and its peers. The SEC has not finalized this proposed rule. The proposing release is available at www.sec.gov/rules/proposed/2015/34-74835.pdf
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 lookback period if the issuer has a material accounting restatement. In July 2015, the SEC proposed a rule directing national securities exchanges and associations to establish listing standards requiring issuers to adopt policies that require executives to pay back erroneously awarded compensation during the three fiscal years prior to the date the issuer is required to prepare an accounting restatement. The proposed rules are minimum standards to be used by the exchanges in developing their own standards. The SEC has not finalized this proposed rule. The proposing release is available at www.sec.gov/rules/proposed/2015/33-9861.pdf.
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. In December 2018, the SEC adopted a rule that requires issuers to disclose in proxy or information statements for the election of directors any practices or policies it has adopted regarding the ability of employees (including officers) or directors to engage in hedging transactions regarding company equity securities granted as compensation to, or otherwise held by, those persons. The SEC has not finalized this proposed rule. The release is available at www.sec.gov/rules/final/2018/3310593.pdf
Other disclosures
The Dodd-Frank Act required the SEC to enact rules to require issuers to disclose the following if they have mine safety issues, use conflict minerals, or make payments to governments for resource extraction.
Mine safety disclosures
The mine safety rules issued in response to the Dodd-Frank Act require issuers that are mine operators to disclose information related to health and safety violations in each periodic report filed with the SEC. This information should include the number of certain violations, orders, and citations received from the Mine Safety and Health Administration (MSHA). Form 8-K filings are also required for certain MSHA communications.
Conflict minerals
As it is written, the conflict minerals rule requires companies to determine and publicly disclose on an annual basis (on Form SD) whether their products were manufactured using certain minerals, designated as “conflict minerals,” and whether those minerals originated in the Democratic Republic of the Congo or adjoining countries (collectively, the “covered countries”). If so, an issuer is required to provide a report on Form SD describing the measures taken to determine whether the minerals financed or benefited armed groups in the region and its conclusions. The process surrounding the assertions made on the report is required to be audited in certain circumstances.
The rule applies to all SEC reporting companies that use conflict minerals necessary to the functionality or production of a product manufactured or contracted to be manufactured by the company. An issuer who mines conflict minerals is not considered to manufacture conflict minerals unless the issuer also engages in manufacturing. Conflict minerals are defined as cassiterite, columbite-tantalite, gold, wolframite, and their derivatives.7 Due to the many uses of these minerals (for example, soldering, electronics, and the like), this rule affected many companies in many industries. The determination of whether an issuer manufactures or contracts to manufacture products containing conflict minerals and whether conflict minerals are necessary to the functionality or production of those products can require significant judgment. Issuers are required to perform procedures to determine the origin of the conflict minerals they use and report the results of that effort on newly created Form SD, which was created for the purpose of reporting information required by this rule and the new rule requiring disclosure of payments to governments by resource extraction issuers (which is discussed subsequently). The disclosures are not subject to officer certifications and will not be deemed to be incorporated by reference into filings made under the Securities Act of 1933.
Reporting is required on a calendar year basis regardless of an issuer’s fiscal year-end and is due by May 31 of the following year. The first report covered the 2013 calendar year and was due on June 2, 2014. Transitional relief is provided for the first four years for smaller reporting companies. Under the transition relief provision, if a smaller reporting company is unable to determine whether the minerals originated in the covered countries or financed or benefited armed groups, it may categorize the related products as “DRC conflict undeterminable” for up to four years (products categorized as undeterminable do not need to be audited). In addition, Form SD provides delayed implementation periods for reporting on activities of newly acquired businesses and applying new due diligence frameworks that become available.
7 The derivatives are limited to tantalum, tin, and tungsten (referred to as the 3Ts) unless the Secretary of State subsequently determines there are other derivatives financing conflict in the DRC.
The conflict minerals rule was met with much controversy. In April 2014, a U.S. Court of Appeals issued a ruling that determined a portion of the conflict minerals rule to be an infringement of constitutional rights of free speech. Specifically, to the extent a company would have to report that any of their products “have not been found to be ‘DRC conflict free’ ” would be a violation of their constitutional rights.
The SEC staff issued guidance on how companies should comply with the aspects of the conflict mineral rule that were not affected by the court’s decision. The guidance indicated that a Form SD should still be filed and describes the company’s reasonable country of origin, inquiry procedures, and the results. Further, if required, a conflict minerals report should be filed as part of the Form SD and that report still needs to disclose the due diligence procedures undertaken. Within the conflict minerals report, there is no longer a requirement to describe any of the products as being “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.” If any of the products would have been labeled in the latter two categories, a company should identify those products, the facilities used to produce the conflict minerals, the country of origin, and the company’s efforts to determine the mine or location of origin. A company may voluntarily elect to describe its products as being “DRC conflict free” — provided that it has obtained an independent private sector audit. In the absence of such a description, an audit is not required.
In April 2017, a U.S. district court entered a final judgment in the ongoing lawsuit related to the rule. The final judgment upholds the U.S. Court of Appeals decision (referenced earlier) that a portion of the conflict minerals rule infringes upon a company’s constitutional right of free speech. The SEC now needs to determine how to address the court’s decision.
In light of the final judgment, the then-acting SEC chairman issued a statement directing the SEC staff to begin work on a recommendation. The SEC staff also issued updated guidance on how a company should comply with aspects of the conflict minerals rule not affected by the court’s decision. The guidance clarifies that the SEC staff will not enforce compliance with Item 1.01(c) of Form SD. Item 1.01(c) requires companies to conduct due diligence on the source and chain of custody of conflict minerals. The acting SEC chairman expressed support for this guidance in his statement, explaining that the primary purpose of the work required by Item 1.01(c) is to make a disclosure that has since been found to be unconstitutional.
Resource extraction issuers
In 2012, the SEC adopted Exchange Act Rule 13q-1 (the “resource extraction issuer rule”), which was mandated by Section 1504 of the Dodd-Frank Act. The resource extraction issuer rule would have required resource extraction issuers to disclose information about certain payments made to the United States government or foreign governments. A federal judge vacated the rule in July 2013, ruling that the SEC misread Section 1504 of the Dodd-Frank Act to require public disclosure of such information primarily because the statute does not use the word “public” to describe the disclosure and reporting requirements. He also noted that the SEC’s decision to deny any exemptions from the rule was “arbitrary and capricious.” The SEC reproposed the rule in December 2015 and adopted it in June 2016. The proposal and final rule were substantially consistent with the rule adopted in 2012. In February 2017, the
President signed a resolution passed by Congress that nullifies Rule 13q-1; as a result of the nullification, the rule will not go into effect.
Modernization of property disclosures for mining registrants
In October 2018, the SEC adopted amendments to modernize property disclosures for mining registrants. The amendments aim to improve the quality and reliability of information provided to the investors by closely aligning the disclosure requirements and policies for mining properties with current industry and global regulatory practices and standards.
Key aspects of the amendments include the following:
Require a registrant with material mining operations to disclose certain information concerning its mineral resources in addition to its mineral reserves.
Require a registrant’s disclosure of exploration results, mineral resources, or mineral reserves in SEC filings to be based on, and accurately reflect, information and supporting documentation prepared by a “qualified person” (i.e., a mining expert).
Require a registrant to obtain a dated and signed technical report summary from the qualified person. This technical report summary will also be filed as an exhibit to the relevant SEC filings in certain circumstances.
Require certain registrants with material mining operations to provide investors with an overview of its properties and mining operations, including summary and individual property disclosure provisions in either a narrative or tabular format.
Provide updated definitions of mineral reserves and mineral resources.
The final rules reflect numerous changes to the proposed rules issued in June 2016 based on feedback received by the SEC on the proposal. The SEC’s press release on the amendments contains further details about these changes.
Registrants are required to comply with the new rules in their first fiscal year beginning on or after January 1, 2021. Registrants may voluntarily apply the new disclosure requirements at an earlier date. The existing disclosure requirements contained in Guide 7 remain effective until all registrants are required to comply with the final rules, at which time they will be rescinded.
Security ratings
Rating agency consents
The Dodd-Frank Act makes significant changes to the regulation of credit rating agencies and requires the SEC to adopt a number of new rules to implement these changes. The act itself immediately instituted credit rating agency consent requirements by repealing Securities Act Rule 436(g). Before its repeal, Rule 436(g) had allowed issuers to provide credit rating information in a registration statement or prospectus without providing a credit rating agency’s consent.
As a result of the repeal of Rule 436(g), issuers are required to provide a consent from the credit rating agency if information about the security’s credit rating is included or incorporated by reference in a 1933
Act registration statement or a prospectus.8 If, however, the issuer discloses a credit rating in a filing with the SEC that is related only to the company’s liquidity, cost of funds, the terms of agreements that refer to credit ratings, or changes in credit ratings, the SEC considers this to be “issuer disclosure-related ratings information,” and a rating agency consent is not required. Examples of issuer disclosure-related ratings information follow:
An issuer notes its ratings in the context of a risk factor discussing the risk of failing to maintain a certain rating and the potential impact a change in credit rating would have on it.
An issuer refers to or describes its rating in the context of its liquidity discussion in management’s discussion and analysis (MD&A).
An issuer describes debt covenants, interest rates, or dividend restrictions that are tied to credit ratings.
SEC staff guidance on the consent requirement is available on the SEC’s website at Compliance and Disclosure Interpretations, Securities Act Rules, Sections 233.04-08, www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm
Short form registration statements
Section 939A of the Dodd-Frank Act mandated changes requiring the SEC to eliminate form and rule requirements based on security ratings, including one of the short-form transaction criteria that the issuer have an investment-grade credit rating. The final rules preserve the use of short forms by registrants that are widely followed in the market. The rule changes primarily affect companies that do not meet the $75 million float test in short forms and are registrants because of previously registered debt offerings; however, these issuers can continue to use short form registration statements for three years if they satisfy the prior short-form transaction requirements.
The
Jumpstart Our Business Startups Act of 2012
In April 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law.9 A primary goal of the JOBS Act is to improve small companies’ access to public capital markets. The act amends a number of provisions of the securities laws to ease the process and costs associated with raising capital from the public.
8 Regulation AB governs offerings of asset-backed securities and requires issuers of ABS to disclose whether an issuance or sale of any class of such securities is conditioned on the assignment of a rating by a credit rating agency and, if so, the minimum credit rating and identity of each agency. With the rescission of Rule 436(g), this Regulation AB requirement necessitates a consent from a credit rating agency, but credit rating agencies have been unwilling to provide such consents. In order to facilitate transition and permit registered offerings of ABS to continue without interruption, and allow adequate time to complete regulatory actions required by the Dodd-Frank Act, the SEC staff issued a no-action letter that indefinitely extends the ability to omit the credit rating disclosure from registration statements filed under Regulation AB.
9 The complete text of the law is available at www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS112hr3606enr.pdf
