(The news featured below is a selection from the news covered in SEC Today, which is distributed to subscribers of SEC Today.)

SEC Adopts Offering Reform Measures and Addresses Issues Remanded by Court

Commissioner Cynthia Glassman said that the headline for yesterday's open meeting should be the unanimous vote to approve amendments to the securities offering process rather than the contentious split vote on the matters remanded to the Commission by the U.S. Court of Appeals for the District of Columbia regarding independent directors and chairs of mutual funds. The split vote brought accusations from both sides about the other's agenda in choosing to act, or in arguing against taking action, so quickly after the court rendered its decision. The SEC also adopted amendments to Forms S-8, 8-K and 20-F with respect to disclosure by shell companies. The actions came on the eve of Chairman William Donaldson's departure from the Commission.

The securities offering reform rules allow more communications during securities offerings, make procedural improvements to the registration process and address the delivery of information, including final prospectuses, to investors. The adopting release will include additional guidance on liability under 1933 Act sections 12(a)(2) and 17(a)(2) with respect to material misstatements or omissions prior to or at the time of a sale. Well-known seasoned issuers will have significantly more flexibility in shelf registrations. The 1934 Act periodic reports will include disclosure about risk factors and companies will report whether they are a voluntary filer or well-known seasoned issuer. Accelerated filers and well-known seasoned issuers will have to disclose any staff comments that remain unresolved for 180 days at the end of the fiscal year and at the time of the filing of their annual report.

Glassman noted that Alan Beller, the director of the Division of Corporation Finance, originally was recruited by then Chairman Harvey Pitt to accomplish the securities offering reform task, but the Enron and WorldCom scandals, and the Sarbanes-Oxley Act derailed the initiative for a time. She congratulated Beller on concluding the task. Commissioner Harvey Goldschmid predicted that the constructive, incremental changes embodied in the rules will prompt a quiet revolution in the securities offering process. Commissioner Paul Atkins said the reform measure reflected some of the best work the Commission has done in years, if not decades. He also tipped his hat to Pitt and Beller for the completion of the project. The amendments will take effect 120 days after publication in the Federal Register.

Shell Companies

The new shell company rules will prohibit the use of Form S-8 by shell companies and add a new item to Form 8-K to require disclosure of when companies cease to be shell companies. Once a company ceases to be a shell company, it must disclose information comparable to what is required in a 1934 Act registration statement. Foreign private issuer shell companies must report on Form 20-F when they cease to be shells and must provide disclosure comparable to that which domestic companies report on Form 8-K. Shell companies will have to identify on the cover page of their periodic reports whether they meet the definition of a shell company. The commissioners voted unanimously to adopt the amendments. Goldschmid observed that shell companies have too often been the playground for fraudsters.

Investment Company Governance Rules

In the case brought against the SEC by the Chamber of Commerce, the court held that the SEC had the statutory authority to adopt the fund governance rules and that its underlying rationale for doing so was reasonable. However, the court also remanded for reconsideration the costs of complying with the 75% of independent directors and independent chair conditions and a disclosure alternative to the independent chair condition. Donaldson called the independent chair condition a capstone to the SEC's mutual fund governance reforms.

Donaldson addressed the timing of yesterday's action, stating that it was fully consistent with the court's opinion and other legal requirements related to SEC rulemaking. The issues raised by the court were clearly defined, he said, and the existing record and other publicly available materials permitted the SEC to address them without a second notice and comment period. The court did not vacate the rules, he added, but remanded the two issues without ordering any particular procedures, indicating that the deficiencies could be cured without reversing course or restarting the process. Failure to act would throw the rule into limbo, Donaldson added, while awaiting the confirmation of a new chairman.

Meyer Eisenberg, the acting director of the Division of Investment Management, explained that the release addressing the court's concerns contains 16 pages of detailed estimates of costs. The staff used generous assumptions in the high range of costs. As for the alternative choice of disclosing whether a fund has an independent chair, the staff did not believe it would achieve the goals of the rulemaking, nor would it be sufficient for the protection of investors, and did not recommend the adoption of the disclosure alternative.

Glassman disagreed with what she saw as a rush to address the issues remanded to the Commission to address the deficiencies of the rules and said the SEC should seek additional comment. She said that one week after the remand did not provide enough time for a thorough review of the record. The majority feared that, without the chairman's vote, the rule would not be approved, she said. Glassman also criticized the chairman's request that any concurring or dissenting views be circulated prior to the meeting, which she said was not possible given the short notice before the meeting.

Glassman also maintained that the release reflects a "back of the envelope" estimate of costs, includes false statements and unsupported assumptions. She noted that the Commission has received a number of letters in the past week urging it not to act so quickly on the remanded items and was told that those letters will not be posted on the SEC's Web site.

General Counsel Giovanni Prezioso explained that the reason for requesting the circulation of dissents was that the court's opinion said they should be considered and the Commission was attempting to address that view.

Goldschmid said everyone understands that Glassman and Atkins oppose the rule on its merits, but they refuse to acknowledge that the court upheld the merits of the SEC's actions. He said the staff release reflected a very serious cost analysis, not a "back of the envelope" exercise. Associate Director Robert Plaze explained that the hardest part of the analysis is where to begin, but in this case, the court told the staff exactly how to do it. In most rulemaking initiatives, one or two staff attorneys do the cost-benefit analysis, he added, but in this case, six or seven staff members analyzed the data. The staff seldom receives good cost-benefit material in the comments, he added.

Goldschmid pointed out that the fund scandals revealed grievous breaches of trust. The Commission labored too hard and the issues are of too great an importance not to act promptly, in his view. He characterized as "crocodile tears" the view that the SEC should not move so quickly out of respect for the court of appeals. If the SEC's action is not fully responsive, the court will say so, according to Goldschmid, but if it is right, investors will benefit.

Atkins presented a chart on what he referred to as the SEC's "race to beat the clock." The ink on the court's opinion was not even dry before the response was initiated, he said. He noted that some funds have already begun to comply with the SEC's fund governance rules and a survey could have revealed the costs of their actions. Further, no one on the staff sought his views on the disclosure alternative to mandating an independent fund chair before deciding it was not a viable approach. Atkins added that rules should be able to weather the changing composition of the Commission.

The court's ruling was not a victory for the SEC, according to Atkins. He said its holding that the SEC violated the law was an embarrassment and he challenged the view that the rules remain in effect given the violations found by the court. Since the letters in opposition to the SEC's rapid response to the court's decision will not be posted on the Web site, Atkins said he will attach them to his written dissent.

Prezioso noted that the SEC has taken expedited action in numerous instances such as the WorldCom scandal, Arthur Andersen's demise and the Sarbanes-Oxley Act rules. He pointed out that the current commissioners, other than the chairman, adopted 15 rules in the final weeks before Pitt's departure. Atkins countered that yesterday's action was a rush of their own making and the question was whether the staff should have been directed to do so.

Commissioner Roel Campos whole-heartedly disagreed with Atkins' view that the SEC rushed to judgment. The timeline must be viewed from when they began the rulemaking process, he said. One can disagree with the rulemaking, but there is no basis for calling it illegitimate, he said. As for suggestions of a hidden agenda, Campos pointed to the view of some that action on the rule should be delayed in the hope that it would lead to its elimination, or that a different Commission would decide it differently. There is nothing illegitimate about taking this action at this time, he said.