• Miscellaneous Corporate and Securities
  • July 28, 2010 | Authors: David B. Miller; Erik Romslo
  • Law Firm: Faegre & Benson LLP - Minneapolis Office
  • The Dodd-Frank Wall Street Reform and Consumer Protection Act addresses a number of additional corporate and securities matters, including: exemption from Sarbanes-Oxley Act 404(b) for non-accelerated filers, changes to Regulation D and the accredited investor definition, issues related to derivates and beneficial ownership reporting, and expansion of Public Company Accounting Oversight Board authority.

    Exemption from SOX 404(b) for Non-Accelerated Filers

    Although the SEC postponed implementation for non-accelerated filers of Section 404(b) of the Sarbanes-Oxley Act for many years, it was finally set to become effective for fiscal years ending after June 15, 2010. Section 404(b) requires an independent audit of internal controls over financial reporting.

    The Act now exempts non-accelerated filers, which are generally companies with market capitalizations below $75 million, from compliance with the requirements of Section 404(b). Further, the Act requires the SEC to conduct a study within nine months to determine how the SEC could reduce the burden of complying with Section 404(b) for companies with market capitalizations between $75 million and $250 million, while maintaining investor protections for those companies, and whether exemption would encourage IPO listings on U.S. exchanges.

    Regulation D and Accredited Investors

    Regulation D contains rules that provide exemptions from the registration requirements of the Securities Act of 1933. One important aspect of Regulation D is the definition of "accredited investors," which is a category of investors which the SEC deems, in certain circumstances, to be sufficiently sophisticated to invest in securities without the full protections of the Securities Act. Individuals are accredited investors if either:

    • their net income exceeded $200,000, or joint net income with their spouse exceeded $300,000, in the two most recent years (and there is a reasonable expectation of reaching the same income level in the current year), or
    • their net worth, or joint net worth with their spouse, exceeds $1 million.

    The Act does not change these dollar thresholds. However, it specifies that the value of an individual's primary residence must be excluded in determining whether his or her net worth exceeds $1 million, while previously it was permitted to be included. This change is effective immediately upon enactment and will remain in effect for at least four years thereafter. The Act also permits the SEC to review and adjust any other accredited investor standards applying to individuals during such four-year period.

    Following the initial four-year period, the SEC will be required to review all accredited investor standards applying to individuals at least once every four years and, to the extent it deems appropriate, adjust such standards. In addition, the Comptroller General is required to submit a study within three years of enactment of the Act on the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds.

    Regulation D includes three rules that provide exemptions from registration under the Securities Act—Rules 504, 505 and 506. Rules 504 and 505 are not available to certain issuers affiliated with felons and other "bad actors," and the Act requires the SEC to issue rules within one year to make those exclusions also apply with respect to Rule 506.

    Derivatives and Reporting of Beneficial Ownership

    The Act anticipates SEC rulemaking to determine how derivatives should be treated for purposes of determining beneficial ownership under Section 13 and Section 16 of the Securities Exchange Act of 1934, and the reports required thereby. In addition, the Act amends the Securities Exchange Act to permit the SEC to adopt rules that would shorten the period within which a Schedule 13D or a Form 3 must be filed with the SEC. Currently, a Schedule 13D must be filed by a person within 10 days of acquiring beneficial ownership of more than 5 percent of a registered class of equity securities, and a Form 3 must be filed by a person within 10 days of becoming a director, officer, or greater than 10 percent shareholder of a public company. There has been no indication as to when, or whether, the SEC will propose rules with respect to these matters.

    Authority of the Public Company Accounting Oversight Board

    The PCAOB was created by the Sarbanes-Oxley Act for the purpose of overseeing accounting firms that audit public companies. The Act extends the authority of the PCAOB to also oversee accounting firms that audit brokers and dealers, and to refer investigations with respect to an audit of a broker or dealer to that broker's or dealer's self-regulatory organization.

    In addition, the Act authorizes the PCAOB to share documents and information it prepares or receives in connection with an inspection with a foreign auditor oversight authority, without such information losing its privileged status, if it deems it necessary for the protection of investors and the foreign authority provides assurances of confidentiality.