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SEC Backs Away from Revised S-3 Rules
March 20, 2006

SEC Backs Away from Revised S-3 Rules

The SEC has been on the receiving end of some tough criticism in the past several weeks on issues of great importance to investors and filers, including a proposal regarding a tightening of disclosure requirements for S-3 filers. A March 4, 2006 speech by SEC Chief Counsel David Lynn suggested that filers needed to include information traditionally disclosed in proxy statements, including disclosure regarding compensation for officers and directors, in their 10-K before the release of a proxy statement.

Under existing rules, proxy statements must be released with 120 days of a company's fiscal year end. In a report published 3/10/06 by KattenMuchinRosenmanLLP, the Chicago-based law firm relates that "SEC David Lynn, Chief Counsel of the Division of Corporation Finance of the Securities and Exchange Commission warned S-3 filers that if their Form 10-K incorporated proxy statement information by reference and they have not yet filed their proxy statement, and they incorporate their Form 10-K by reference into the S-3, the SEC will not declare the registration statement effective unless the proxy statement information is included in the S-3 prospectus or a Form 10-K/A."

On Friday, however, KMR's Corporate and Financial Weekly Digest reported a dramatic turnabout in the SEC's position: "In a private telephone conversation among four prominent New York attorneys and senior SEC Staff members, the statement by Mr. Lynn with respect to Well-Known Seasoned Issuers ("WKSI") shelf take-down was withdrawn. We understand the Staff's current position to be that they will not object to a take-down from an accelerated shelf registration statement even if the current proxy statement information is not included in the take-down prospectus or a previously filed Form 10-K or proxy statement. The Staff is reported to have stated that the parties must make their own decisions as to whether the registration statement and prospectus satisfy applicable disclosure requirements."

KMP adds that "The Staff apparently does not intend to publish or otherwise make public either its March 4th SEC Speaks position or its changed position."

Broc Romanec, editor of thecorporatecounsel.net blog, observes: "The bottom line: while a WKSI technically can file an automatic shelf registration statement after filing its Form 10-K and before filing its proxy, it cannot conduct an offering under that newly-filed automatic shelf registration statement until such time as the Part III information is filed (via 10-K/A, proxy statement or prospectus supplement)."

One NY-based lawyer who follows SEC matters closely tells the IRA that the proposal by Lynn could have forced companies to include information normally disclosed in the proxy statement in their 10-Ks. Otherwise, "there could have been a window of time between the release of the 10-K and the release of the proxy statement when seasoned issuers could not go to market relying upon a shelf registration."

The SEC has received generally positive comments about its rule requiring expanded disclosure of officer & director compensation, but the response by filers to Mr. Lynn's comments illustrates that the practical effect of these disclosure requirements is still a work in progress. Officials at the SEC did not respond to our request for comment prior to press time, but we will be following this issue in future editions of the IRA.

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