Small Public Company Forum

New Rules Applicable for 2011 Proxy Season for Most Companies – August 30, 2010

On August 25, 2010, the SEC adopted Rule 14a-11, the shareholder proxy access rule that was originally proposed on June 10, 2009. The SEC approved a revised version of the rule by a 3-2 vote along party lines. The recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act clarified the SEC’s authority to order proxy access and thus removed a major legal concern about enforcement of the rule.  The following is a brief summary of the new proxy access rules.

What is “Proxy Access”?

Rule 14a-11 provides large shareholders of public companies with a right to nominate directors and have the nominees included in the company’s proxy statement and on the company’s ballot, thus granting them “proxy access.”  Although shareholders have generally been able to nominate director candidates prior to the adoption of Rule 14a-11, they have not been entitled to have their nominees included in the company’s proxy materials. Instead, shareholders have been required to go through the expense of filing separate proxy statements with the SEC and conducting their own shareholder mailings.

Which companies are subject to Rule 14a-11?

All public companies and registered investment companies that are subject to the proxy rules will be subject to Rule 14a-11, although application of the rule to smaller reporting companies is being delayed by three years.  The rule will not apply to foreign private issuers¹ or to companies that are subject to reporting requirements solely because they have registered debt.

Do all shareholders have the right to proxy access?

No.  In order to nominate directors and have them included in the company’s proxy materials, a shareholder (or a group of shareholders who aggregate their holdings) must have continuously owned at least 3%² of the total voting power of a company’s securities for three years as of the date that the shareholder or group notifies the company of its proposed nomination³ and must state in writing an intention to continue to hold those shares through the date of the company’s annual meeting. 

How do eligible shareholders exercise their proxy access rights?

A nominating shareholder (or group) must submit a notice to the company no earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of the date on which the company mailed its proxy materials for the previous year’s annual meeting.⁴  A nominating shareholder must also file this notice with the SEC.

The notice, which will be in the form of a new Schedule 14N, must disclose a variety of matters, including:

• the amount and percentage of securities owned by the nominating shareholder;
• the length of time of the nominating shareholder’s ownership;
• information about the nominating shareholder and nominees that is the same as would be required in a proxy contest;
• the nominating shareholder’s intent to continue to hold the securities through the date of the meeting, and
• whether the nominee satisfies the director qualification requirements, if any, as set forth in the company’s governing documents.

Schedule 14N also requires that the nominating shareholder or group certify that it is not seeking to change control of the company or to gain more than minority representation on the board of directors. A nominating shareholder or group may also submit a statement of support for the nominee that is no longer than 500 words to be included in the proxy statement.

The nominating shareholder or group will be liable for any false or misleading statements included on Schedule 14N or which the shareholder causes to be included in the company’s proxy materials. A company will not be responsible for information provided by the nominating shareholder or group and then reproduced in the company’s proxy materials.

How many nominees can be placed on the ballot by shareholders?

A shareholder or group may nominate and include in the company’s proxy materials the greater of one nominee or up to 25% of the number of total board seats.⁵  If more nominees are submitted than would be permissible under the rule, the company will be required to include in its proxy materials only the nominees put forward by the largest shareholder(s) or group(s) who have made valid nominations.

Who can be nominated as a shareholder candidate? Are there other limitations on the right to proxy access?

For a nominee to be eligible for inclusion in a company’s proxy statement under Rule 14a-11, the nominee must satisfy the objective independence standards of the national securities exchange on which the company’s securities are listed. Further, neither the nominating shareholder nor the nominee may have any direct or indirect agreement with the company regarding the shareholder’s nomination and the nominating shareholder (or group) must not have the intent of changing control of the company. The SEC’s no-action letter process can be used by companies to exclude shareholder nominees if they believe a shareholder nominee or a nominating shareholder (or group) does not satisfy the new rule’s eligibility requirements.

Can companies “opt out” of proxy access?

No.  Proxy access is mandatory and neither companies nor shareholders are permitted to opt out or limit the availability of the new proxy access rules. A company’s shareholders may, however, choose to adopt access rules that provide for greater access either through a management recommendation or a shareholder proposal under Rule 14a-8.

How does proxy access apply to a company if its governing law or charter documents prohibit shareholders from nominating directors or if they provide for nominating procedures that are inconsistent with Rule 14a-11?

Rule 14a-11 will not apply to a company if its governing law or charter documents prohibit shareholders from nominating directors altogether. If shareholder nominees are prohibited by a company’s charter documents but permitted by governing law,⁶ new amendments to Rule 14a-8 will permit shareholders to submit a proposal for inclusion in the company’s proxy statement that seeks to remove such prohibition through amendment of the charter documents.⁷  Where governing law and a company’s charter documents permit shareholder nominations but prohibit inclusion of shareholder nominees in the company’s proxy materials, or establish share ownership or other requirements that are inconsistent with Rule 14a-11, shareholders will be permitted to submit director nominees under Rule 14a-11 as long as they satisfy the requirements of the rule (without regard to prohibitions in, or inconsistencies with, governing law or charter documents). For example, if a company’s bylaws require that shareholder nominees be included in company proxy materials only if submitted by a 10% shareholder, a shareholder who does not meet the 10% threshold but does meet all requirements of Rule 14a-11 (including the 3% ownership threshold described above) would be able to submit its nominee(s) for inclusion in the company’s proxy materials pursuant to Rule 14a-11.

Where governing law or charter documents are more permissive than Rule 14a-11 in certain respects and more restrictive in other respects, a shareholder may rely on either Rule 14a-11 or on governing law and the company’s charter documents.⁸  In this instance, however, a shareholder must clearly evidence its intent to rely on one or the other, and then meet all of the requirements of whichever procedure it selects. Shareholders may not “pick and choose” among the different aspects of different procedures.

When do the proxy access rules take effect?

Rule 14a-11 will be effective for the 2011 proxy season for most calendar year-end companies, other than smaller reporting companies.  Specifically, the rule will take effect 60 days after the publication of the adopting release in the Federal Register, which is expected to occur as early as this week. However, the deadline for submitting a nominee is 120 days before the anniversary of the current year’s proxy mailing. As a result, access applies for an annual meeting next year only if the first anniversary of the mailing of proxy materials for the current year occurs 120 days or more after effectiveness.  For example, if the adopting release is published in the Federal Register on September 2, 2010, Rule 14a-11 would become effective on November 1, 2010. Under this scenario, and in light of the 120-day advance notice requirement, the proxy access rules would apply only to companies that mailed their proxy materials for the previous year’s annual meeting on or after March 1, 2010.

Are smaller reporting companies subject to Rule 14a-11?

Yes.  However, implementation of the proxy access rules as they apply to smaller reporting companies (generally under $75 million in public float) will be deferred for three years. Companies that currently qualify as smaller reporting companies will be required to comply with Rule 14a-11 immediately upon ceasing to be a smaller reporting company.

Where can I obtain a copy of the SEC’s adopting release?

The adopting release, which includes the full text of the final rule, can be found at http://www.sec.gov/rules/final/2010/33-9136.pdf.

¹   “Foreign private issuers” are not subject to the SEC’s proxy rules and, therefore, are not subject to Rule 14a-11.

²   When calculating the 3%, shareholders will be able to pool assets and include securities loaned to a third party as long as they can be called back. However, securities sold, shorted or not held through the company’s annual meeting will need to be deducted.

³  The ownership test is based on percentage of “voting power” of the company’s securities entitled to be voted at the meeting, rather than as a percentage of outstanding securities. Accordingly, where a company has multiple classes of stock with unequal voting rights and the classes vote together on the election of directors, voting power would be calculated based on the collective voting power of all such classes.

⁴  If the date of a company’s annual meeting has changed by more than 30 days from the prior year, or the company did not hold an annual meeting during the prior year (or if a company is holding a special meeting or conducting an election of directors by written consent), then the notice is required to be submitted to the company and filed with the SEC a reasonable amount of time before the company mails its proxy materials.  In this scenario, the company is required to file a Current Report on Form 8-K under new Item 5.08 disclosing the date on which notifications must be received.  The Form 8-K must be filed within four business days after the current year’s meeting date has been determined.

⁵   For companies with staggered boards, shareholders will be entitled to nominate and include 25% of the number of total board seats (not 25% of the lesser number of board seats that are up for election at a particular meeting). Once elected, however, a shareholder-nominated director whose term extends beyond the date of the subsequent year’s meeting would count for purposes of the 25% maximum at such subsequent year’s meeting.

⁶   The SEC’s adopting release notes that the SEC is not aware of any state laws that prohibit shareholders from nominating directors.

⁷   Prior to the effect of the Rule 14a-8 amendments, Rule 14a-8 permits companies to exclude a shareholder proposal from company proxy statements if the proposal relates to a director nomination or election or procedure for such nomination. As amended, the rule will permit the exclusion of a shareholder proposal related to director elections only if the proposal (i) would disqualify a nominee who is standing for election; (ii) would remove a director from office before the expiration of his or her term; (iii) questions the competence, business judgment, or character of one or more nominees or directors; (iv) seeks to include a specific individual in the company’s proxy materials for election to the board of directors; or (v) otherwise could affect the outcome of the upcoming election of directors.

⁸   For example, if a company’s bylaws require 10% ownership to have nominees included in the company’s proxy materials, but permit 10% shareholders to have nominees up to the full number of board seats included in a company’s proxy materials, Rule 14a-11 would continue to be available for shareholders that are eligible to use it. However, the shareholder could instead choose to proceed under the procedures and standards of the company’s bylaws.

Submitted by Alan Gilbert, Partner at Maslon Edelman Borman & Brand, LLP.

Please join us

Smaller reporting companies need to stay informed about new and developing issues and adopt strategies to deal sensibly with regulatory compliance and risk management in light of their budgeting and personnel constraints. The Small Public Company Forum was created for this very reason, and we invite you to join us for our next forum event:

September 29, 2010 – Small Public Company Forum Event
Hosted by Maslon Edelman Borman & Brand, LLP and Moquist Thorvilson Kaufmann Kennedy & Pieper, LLC

Event Details:
Wednesday, September 29, 2010 | Registration: 7:30 a.m. | Program: 8:00 a.m. – 9:30 a.m
Complimentary Seminar with Continental Breakfast
Maslon Edelman Borman & Brand, LLP | 3300 Wells Fargo Center | 90 South Seventh Street | Minneapolis, MN  55402

Session One: XBRL for Smaller Reporting Companies
Presented by John D. Woodburn, President, Woodburn Group

John’s presentation will provide attendees with the basics of what XBRL is, as well as important information about the SEC’s XBRL mandate, filing requirements and relevant timeline, and XBRL implementation options, planning, and budgeting.  He will also offer a comparison of available XBRL tools.

John is a specialist in the application of technology to accounting processes.  He was named one of the 100 most influential people in accounting technology in America by Accounting Today.  John is a co-author of the AICPA Strategic Electronic Business Initiative, and he chaired the AICPA Electronic Business Task Force.  He is a CPA (inactive), with prior experience at Ernst & Young, and also served as controller for Proex Photo Systems prior to founding Woodburn Group.

Session Two: (Dodd) Frank Talk About New Governance and Compensation Requirements
Presented by Martin Rosenbaum and Paul Chestovich, Partners, Maslon Edelman Borman & Brand, LLP

Marty and Paul will review recent changes to public company governance and compensation requirements effected by the Dodd-Frank Act, including mandatory say-on-pay votes, proxy access provisions, and new compensation disclosure requirements.  Their presentation will include discussion about what smaller reporting companies should do now to get ready for
the implementation of those requirements.

RSVP
Please RSVP by Wednesday, September 22, 2010, by emailing RSVP@maslon.com

Validated parking will be offered in the Gaviidae Common parking ramp. Enter ramp on 6th Street (one-way eastbound). Parking is limited.

Contact us for more information:
 
Paul Chestovich, Partner
Maslon Edelman Borman & Brand, LLP
p 612.672.8305 | paul.chestovich@maslon.com | bio

Mark Leitner, CPA
Moquist Thorvilson Kaufmann Kennedy & Pieper LLC     
p 952.656.2643 | mark.leitner@mtkcpa.com | bio

On June 28, 2010, the U.S. Supreme Court issued its ruling in Free Enterprise Fund v. Public Company Accounting Oversight Board (the “PCAOB”).  In the case, Free Enterprise Fund had argued that the establishment of the PCAOB by the U.S. Congress (through the 2002 Sarbanes-Oxley Act) violated the separation of powers provision in the Constitution through the improper delegation of executive responsibilities to officials beyond the control of the President and the executive branch, and that, as a result, the entire Sarbanes-Oxley Act was unconstitutional. Specifically, Title I of the Sarbanes-Oxley Act had permitted members of the PCAOB to be removed by the U.S. Securities and Exchange Commission (the “SEC”) only for cause.

In a 5-4 decision, the Court held that the separation of powers mandate in the Constitution had been violated through the delegation of executive powers beyond the control of the executive branch.  However, the Court rejected the broad constitutionality challenge that had been advanced by Free Enterprise Fund, and instead provided a narrow remedy to specifically address the separation of powers issue.  As a consequence of the ruling, the President or officials appointed by the President (including the SEC) now possess the unfettered power and authority to discharge members of the PCAOB at will.

Chief Justice John G. Roberts, Jr., writing for the majority, stated that “The consequence [of the ruling] is that the [PCAOB] may continue to function as before, but its members may be removed at will by the [SEC]” and that, with the change in the authority to discharge members on the Board, the Sarbanes-Oxley Act remains “fully operative as a law.”

Click here for the AICPA’s positive response to the Court’s ruling. 

It is presently not known whether (and if so, when) the SEC or others in the executive branch would seek to repopulate the PCAOB with their own appointees.  Other effects of the ruling (such as whether the PCAOB will become fully subject to federal budgetary controls, and whether the acts of the PCAOB prior to the ruling will be considered constitutionally fully valid) are also unclear.

Submitted by Abigail Grenfell, President of Internal Control & Anti-Fraud Experts, LLC.

The SEC’s recent guidance on the use of non-GAAP financial measures offers public companies the opportunity to expand their use of these measures, as long as certain guidelines are satisfied. Many companies have not yet taken advantage of these opportunities.

Adopted in the wake of the Enron scandal, the SEC’s restrictions on non-GAAP financial measures are contained in two separate rules – Regulation G, governing public disclosures outside of SEC filings (including earnings releases), and Item 10(e) of Regulation S-K, governing disclosures within SEC filings. The SEC has also released Compliance & Disclosure Interpretations (C&DIs) interpreting the rules.

In new C&DIs released earlier this year, the SEC loosened some of its previous restrictions on the use of non-GAAP measures. However, the SEC now appears to be asking companies for more consistency in their use of non-GAAP measures in SEC filings and non-GAAP measures in other public disclosures outside of SEC filings.

SUMMARY OF CHANGES IN GUIDANCE

Below is a summary of the more important changes in guidance that are likely to be of interest to smaller reporting companies:

• In its SEC filings, a company may now present non-GAAP financial measures that exclude the impact of recurring items (so long as the excluded items are not labeled as “non-recurring”)—a significant departure from the Staff’s prior guidance under Item 10(e).  To do this, a company should clearly disclose and explain the reasons for eliminating the recurring items in the non-GAAP financial measure.  See C&DI 102.03.
• In its SEC filings, a company may now present non-GAAP financial measures that are not used by management in evaluating the business.  Instead, the new guidance directs companies to disclose the additional purposes, if any, for which management uses the measure, to the extent material.  However, the use of any non-GAAP financial measure must still be accompanied by disclosure of the reasons why management believes the measure is useful to investors.  See C&DI 102.04. 
• When complying with the Regulation G requirement that any non-GAAP performance measure be reconciled to GAAP, a company may present adjustments net of tax provided that the tax effect of each reconciling item, and the manner in which the tax effect was calculated, is disclosed.  Disclosure is typically made through a footnote or in a parenthetical.  See C&DI 102.11.

The other noteworthy development is that, according to at least one national law firm, the SEC Staff has begun advising companies to present non-GAAP financial measures in a consistent manner, whether those measures are disclosed in SEC filings or other forms of public disclosure.  Apparently, this is meant to eliminate the practice of using two different presentations of performance and liquidity—one set of presentations in press releases and a different set of presentations in official SEC filings. 

SUMMARY OF SIGNIFICANT REQUIREMENTS FOR THE USE OF NON-GAAP FINANCIAL MEASURES

For ease of reference and to place the above changes in guidance in context, below is a summary of the most significant current requirements for, and prohibitions on, the use of non-GAAP financial measures in SEC filings and other public disclosures.

The SEC recently issued a new set of Compliance & Disclosure Interpretations (C&DIs) covering the new proxy disclosure enhancement rules passed in December 2009 and effective as of February 28, 2010.  One C&DI touches on the material we presented on at our January 14, 2010 Small Public Company Forum event hosted by Baker Tilly Virchow Krause – the new director qualifications disclosures.  Below are excerpts from the C&DIs and our commentary on complying with the new director qualifications disclosure.  In addition, we thought this would be a good opportunity to close the loop on a question that arose during the January Forum event on the subject of how to reflect performance shares on the revised Summary Compensation Table.

C&DI

Regulation S-K, new Item 401(e)

Question:  For each director and nominee, Item 401(e)(1) requires disclosure of such person’s “specific experience, qualifications, attributes or skills” that led the board to conclude that such person should serve as a director at the time that a filing containing the disclosure is made.  May a company provide these disclosures on a group basis if the directors or nominees share similar characteristics, such as all of them are audit committee financial experts or all of them are current or former CEOs of major companies?

Answer:  No.  The disclosure of each director or nominee’s experience, qualifications, attributes or skills must be provided on an individual basis.  For each person, a company must disclose why the person’s particular and specific experience, qualifications, attributes or skills led the board to conclude that such person should serve as a director of the company, in light of the company’s business and structure, at the time that a filing containing the disclosure is made.  For example, it would not be sufficient to disclose simply that a person should serve as a director because he or she is an audit committee financial expert.  Instead, a company should describe the particular and specific experience, qualifications, attributes or skills that led the board to conclude that this particular person should serve as a director at the time that a filing containing the disclosure is made.

Our Commentary:  This does not alter our advice on best practices delivered at our January Forum event.  To recap, there is no prescribed format for complying with new Item 401(e).  Nevertheless, we believe that companies should consider adding a new paragraph (immediately following or preceding the paragraphs containing the director biographies) that would provide the newly required disclosures.  In this paragraph, companies would adopt a group-oriented disclosure that would begin by identifying the board’s conclusion on qualifications shared among different directors, and then go on to identify the particular experiences, skills and attributes of each director that substantiate those qualifications.  After that, more particular qualifications (not shared by or among directors) would be disclosed.  The key to complying with the C&DI is the inclusion of the particular information for each individual director.  A fine example of this approach appears in the Definitive Proxy Statement filed by Hovnanian Enterprises, Inc. on February 1, 2010 (page 5).

Another approach that would seem to work well would be to include a short summary of the particular experiences, qualifications, skills and attributes in each individual director’s biography.  The only potential difficulty with this approach is separating the facts of the director’s biographical background with the analysis sought by the new disclosure item.  This may not be as difficult as it would first seem.  A fine example of this approach appears in the Preliminary Proxy Statement filed by Fortune Brands, Inc. on February 5, 2010, where the disclosure is set off beneath each biography to make the analysis stand separately from the biographical data.

Although every company’s situation is different, we do not generally recommend that companies use charts or matrices to identify particular experiences, qualifications, skills and attributes of their directors since that kind of presentation could present “political problems” with or among board members.

Performance Shares on the Summary Compensation Table

At our January Forum event, a question arose about how to properly reflect performance shares under the new Summary Compensation Table rules.  “Performance shares” are equity or equity-related grants that have market-, performance- or service-related conditions attached to the vesting or size of the grants. These conditions affect the grant date fair market value of grants for financial reporting purposes.  Under the new rules, the “probable outcome,” as determined under ASC FASB Topic 718 (the successor to FAS 123(R)), is the proper method for determining the “grant date fair market value” for performance shares.

As we discussed at the Forum event, this could lead to some strange numbers in the table. Theoretically, if it is highly improbable that the performance shares would ever vest, then the grant date value could be very low (or even zero). In this case, it would be advisable to provide additional description of the award in the footnotes or narrative disclosure accompanying the table, to help the reader understand why the value in the table is so small.

Thanks to all who were able to attend our second Small Public Company Forum event. The January 13, 2010 program was hosted by Baker Tilly Virchow Krause, LLP in partnership with Maslon Edelman Borman & Brand, LLP and included a panel discussion on drafting MD&A as well as a lively proxy season preview. We had a full house of attendees for the event and a very engaged audience that participated with questions and comments throughout the presentation.

A brief outline of each presentation is provided below along with links to materials where applicable. We have also provided a means for you to submit questions, and provide comments, feedback and suggestions for future topics, by clicking on the “Comments” link  in the upper right corner of this post or in the gray box following the post. We encourage you to do so and hope to hear from you!

Small Public Company Forum Event (January 13, 2010)

Session One  Insight and Practical Advice to Drafting Your MD&A
Rachel Polson of Baker Tilly Virchow Krause, LLP led a discussion with panelists including Bill Kullback, Senior Vice President and CFO of Angeion Corporation (Nasdaq ANGN); Alan Gilbert, partner at Maslon Edelman Borman & Brand, LLP; and Matt Tredinnick, manager at Baker Tilly Virchow Krause, LLP. The panel discussed practical advice and strategy related to drafting your MD&A to provide investors with insight into your company’s operations.

Session Two  Proxy Season Preview: Don’t Get Caught Unprepared
(Presentation Materials | ONSecurities Cheat Sheet)
This informative presentation by Paul Chestovich and Marty Rosenbaum of Maslon Edelman Borman & Brand, LLP provided practical advice on preparing for your 2010 annual meeting.

Topics included:

• Anticipated new SEC disclosure rules, which are expected to be adopted in December and may be effective for 2010
• The impact of Rule 452 — the elimination of discretionary voting by brokers for directors
• The future of shareholder access — possible rights of major stockholders to nominate directors in management’s proxy statement
• Dealing with institutional investors in the current climate
• Proxy drafting tips

On December 22, 2009, the SEC’s division of corporation finance posted on www.sec.gov an updated version of a presentation noting the financial reporting issues the SEC staff frequently encounters with smaller public companies.

Use this link to access the presentation called SEC Staff Review of Common Financial Reporting Issues Facing Smaller Issuers: http://www.sec.gov/news/speech/2009/slides1209wc.pdf

Some of the key discussion points noted in the presentation are the following:

• Guidance about asking the Office of Chief Accountant financial reporting and related questions
• Overview of the SEC Comment Letter Process (as required by Sarbanes-Oxley Act of 2002, at least once every THREE years)
• Best practices for resolving any issues from the SEC Comment Letter
• XBRL  (Interactive Data to Improve Financial Reporting) compliance reminder by the end of 2011
• Effect of current financial economic results on financial reporting and disclosures
• Insight into improvements to Management’s Discussion and Analysis
• Determining fair value for equity transactions, and determining the appropriate treatment of a derivative instrument under ASC 815-40

The 50+ pages of slides are a quick read.  I strongly suggest all officers and audit committee members take the 20-30 minutes to review the data to ensure that, as the company is preparing its 2009 Form 10-K filings, this information is incorporated.

Submitted by Rachel Polson, audit partner at Baker Tilly Virchow Krause, LLP.

Please join us
Smaller reporting companies need to stay informed about new and developing issues in a way that sensibly recognizes their budgeting and personnel constraints, and their tolerance for risk. The Small Public Company Forum was created for this very reason, and we invite you to join us at our next informative event.

January 13, 2010 – Small Public Company Forum Event
Hosted by Baker Tilly Virchow Krause, LLP and Maslon Edelman Borman & Brand, LLP

Event Details:
Wednesday, January 13, 2010 | Registration: 7:30 a.m. | Program: 8:00 a.m. – 9:30 a.m
Complimentary Seminar with Continental Breakfast
225 South 6th Street | 3rd Floor Conference Center | Minneapolis, Minnesota 55402

Session One: Insight and Practical Advice to Drafting Your MD&A
Rachel Polson of Baker Tilly Virchow Krause, LLP will lead a discussion with panelists including Bill Kullback, Senior Vice President and CFO of Angeion Corporation (Nasdaq ANGN); Alan Gilbert, partner at Maslon Edelman Borman & Brand, LLP; and Matt Tredinnick, manager at Baker Tilly Virchow Krause, LLP. The panel will discuss practical advice and strategy related to drafting your MD&A to provide investors with insight into your company’s operations.

Session Two:  Proxy Season Preview: Don’t Get Caught Unprepared
This informative presentation by Paul Chestovich and Marty Rosenbaum of Maslon Edelman Borman & Brand, LLP will provide practical advice on preparing for your 2010 annual meeting.

Specific topics will include:

• Anticipated new SEC disclosure rules, which are expected to be adopted in December and may be effective for 2010
• The impact of Rule 452 — the elimination of discretionary voting by brokers for directors
• The future of shareholder access — possible rights of major stockholders to nominate directors in management’s proxy statement
• Dealing with institutional investors in the current climate
• Proxy drafting tips

RSVP
Please RSVP by Wednesday, January 6, 2010, by e-mailing laura.gallagher@bakertilly.com.

Questions regarding this event should be directed to Rachel Polson at 612.876.4788 or rachel.polson@bakertilly.com.

Validated parking will be offered in the building’s parking ramp. Enter ramp on 7th Street (one-way westbound). Parking is limited.

Have Questions About the Small Public Company Forum?
Please contact Paul Chestovich | p 612.672.8305 | paul.chestovich@maslon.com

On October 2, 2009, the SEC announced its final extension of the auditor-attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 for smaller reporting companies. In justifying the extension, the SEC cited the need to complete its study of whether certain guidance provided in 2007 in the form of Audit Standard No. 5 was effective in reducing compliance costs.

With the new extension, smaller reporting companies with fiscal years ending on or after June 15, 2010 will be required to provide auditor-attestation reports on the effectiveness of their internal controls over financial reporting. Importantly, this extension does not impact management’s responsibility to assess and report on the effectiveness of its internal controls, or the Chief Executive Officer and Chief Financial Officer’s requirement to certify as to the effectiveness of those controls under Section 302 of the Act.

According to SEC Chairman Mary L. Schapiro, “[s]ince there will be no further Commission extensions, it is important for all public companies and their auditors to act with deliberate speed to move toward full Section 404 compliance.” A copy of the short SEC release can be viewed at: http://www.sec.gov/news/press/2009/2009-213.htm.

Over the course of the next six months, companies will be best served by continuing to work with their internal auditors to improve processes and controls, remediate previously identified control deficiencies to reduce adverse findings, and prepare for the forthcoming auditor’s attestation.

Submitted by Abigail Grenfell, President of Internal Control & Anti-Fraud Experts, LLC; and Rachel Polson, Audit Partner at Baker Tilly International.

This summer, the SEC issued an administrative cease-and-desist order against RAM Capital Resources, LLC (“Ram Capital”) and two members/owners involved in the business of RAM Capital.

From 2001 through 2005, RAM Capital and its members had acted as intermediaries in the PIPE financing market, largely by engaging in the business of identifying potential investors in PIPE offerings. Once potential investors were identified (typically hedge funds), they were solicited to invest. RAM Capital also engaged in structuring the PIPE investment and negotiating the terms of the investments with the investors and the issuer. For instance, the accompanying SEC order indicates that the principals of RAM Capital often drafted and distributed to issuers and potential investors PIPE offering term sheets, and provided input on definitive documentation such as purchase agreements. Furthermore, RAM Capital often advised issuers about the structure which a particular PIPE offering should take (e.g., common or preferred equity or convertible debt, etc.).

Occasionally, issuers or registered placement agents would notify RAM Capital about pending PIPE offerings in hopes of obtaining investments from RAM Capital’s investor contacts. RAM Capital was never registered with the SEC as a broker-dealer.

Investors in PIPE offerings compensated RAM Capital by paying a certain percentage of the gross amount invested and by allocating to RAM Capital a certain percentage-based portion of warrants received in the subject PIPE offering.

The SEC issued a cease-and-desist order against RAM Capital and two individual defendants; censured RAM Capital; and suspended the two individual defendants from affiliating or associating with any broker or dealer for up to a 12-month period. The individual defendants were also ordered to pay disgorgement of approximately $365,000 each, with prejudgment interest and a civil penalty ranging form $60,000 to $90,000.

Although the mix of factors cited in the SEC order do not appear to alter the analysis of when a finder may be acting as an unregistered broker-dealer (please see our July 14, 2009 website posting “The Use of Finders in Financing Transactions”), the SEC action is noteworthy because it was undertaken without any other “bad acts” on the part of RAM Capital, the two individual defendants, or any particular issuer. In the context of enforcement actions, it is far more common for the SEC to take enforcement action in the presence of other alleged illegal behavior such as violations of the anti-fraud securities laws. In the RAM Capital case, the SEC’s sole interest appears to have been the enforcement of Section 15(b) of the Securities Exchange Act of 1934, which may signal increased SEC interest in and scrutiny of broker-dealer registration issues.