Capital Markest and Securities

SEC ACCELERATES AND EXPANDS FORM 8-K REPORTING

The SEC’s new rules amending the requirements for Current Reports on Form 8-K under the Securities Exchange Act of 1934 go into effect on August 23, 2004. The new rules:

• accelerate the filing deadlines for most required reports on Form 8-K to four business days from the current deadlines of up to fifteen days,

• expand the types of business, financial and management events required to be reported on Form 8-K, and

• adopt a limited safe harbor for failure to file timely certain required Form 8-K reports.

The new Form 8-K requirements are intended to provide investors with important information about public companies on a "real time" basis, furthering the goals of Section 409 of the Sarbanes-Oxley Act of 2002. The changes to Form 8-K do not require immediate disclosure of all material developments, but rather identify certain "presumptively material" categories of events that will now be subject to mandatory current reporting. Notwithstanding the Form 8-K changes, in managing disclosure practices and investor relations, companies should continue to consider the advisability of prompt disclosure of all material developments as contemplated by stock exchange listing standards and consistent with current widespread practices.

An issuer will be required to file a Form 8-K within four business days of most events that trigger a Form 8-K filing requirement. The new deadlines do not apply to elective filings on Form 8-K made to comply with Regulation FD (which filings remain subject to the shorter 24-hour or simultaneous public disclosure standards of Regulation FD), to report voluntary disclosures or to file certain exhibits.

As amended, Form 8-K has eight new categories of required disclosure items and two items formerly required to be included in periodic reports under the Exchange Act. In addition to those items currently reportable on Form 8-K, the new rules require the following specific events to be disclosed on Form 8-K:

• material amendments to or termination of a material agreement,

• new financial obligations or obligations under off-balance sheet arrangements, and the occurrence of events triggering an increase or acceleration of such obligations,

• any exit or disposal plan, sale of long-lived assets or termination of employees pursuant to a plan of termination under which an issuer will incur material charges under GAAP,

• determination that a material charge for impairment of assets is required under GAAP,

• non-reliability of previously issued financial statements,

• receipt of notices from a stock exchange regarding delisting or failure to comply with continuing listing rules or standards,

• notification by any issuer to a stock exchange of material noncompliance with continuing listing rules or standards,

• any determination by an issuer to transfer or withdraw its listing,

• unregistered sales of equity securities,

• material modifications to rights of security holders,

• departures of executive officers and directors for any reason,

• appointments and elections of new executive officers and directors, and

• amendments to charter and bylaws.

The SEC has reorganized Form 8-K into topical sections to enable investors to more readily identify the content of current reports.

The SEC amended rules 13a-11 and 15d-11 under the Exchange Act to provide that the failure to timely file a Form 8-K reporting one or more of the first five events listed above (relating to material agreements, financial obligations, asset dispositions or employee terminations, material charges and nonreliability of financial statements) will not be deemed to violate Section 10(b) and Rule 10b-5 under the Exchange Act. The safe harbor applies only to the failure to timely file the report, and any material misstatements or omissions in a filed report will continue to be subject to Section 10(b) and Rule 10b-5 liability.

If an issuer fails to timely file a Form 8-K for any of these items, the issuer must include the required disclosure in its next periodic report. Forms S-2 and S-3 (and Forms F-2 and F-3) eligibility requirements will now provide that failure to timely file a Form 8-K for such "safe harbor" items will not result in a loss of eligibility to use those forms, so long as the issuer files the disclosure required by such items on or before the date the registration statement is filed.

The SEC also amended the "current public information" requirement of Rule 144 under the Securities Act to provide that the rule will be satisfied even if an issuer has not filed Form 8-K reports related to such items during the 12-month period preceding a Rule 144 sale. Therefore, affiliate resales under Rule 144 will not be jeopardized by an issuer’s failure to timely comply with Form 8-K reporting requirements related to such items; however, insiders would be well-advised not to sell securities into the market unless the issuer has in fact filed any required Form 8-K reports in order to avoid potential insider trading concerns.

In light of the expanded number of events requiring the filing of a Form 8-K and the accelerated timeframe in which such reports must be filed, issuers should make appropriate refinements to their disclosure controls and procedures. For example, personnel responsible for executing, amending or terminating contracts which might be material should be charged with notifying a designated person with responsibilities for SEC reporting in advance of such events. Personnel responsible for other events triggering a Form 8-K reporting obligation should be similarly advised of their new responsibilities.

In the adopting release, the SEC clarified its position that Section 906 certifications are not required to accompany Form 8-K reports.

RECENT EFFECTIVENESS OF NASD’S IPO AND UNDERWRITING RULES

Several significant changes in NASD regulation of certain securities offerings went into effect in March 2004. These changes are discussed below.

Effective March 23, 2004, the NASD replaced its previous Free-Riding and Withholding Interpretation with new NASD Conduct Rule 2790. The new rule is designed to protect the integrity of equity IPOs by requiring that:

• underwriters make bona fide offerings at the offering price,

• underwriters not withhold securities in public offerings for their own benefit or use such securities to reward persons who are in a position to direct future business, and

• industry insiders, including NASD members, not take advantage of their "insider" status to purchase "new issues" at the expense of public customers.

The new rule applies to all "new issues,"¹ unlike the Interpretation, which applied only to "hot issues" (public offerings of securities that trade at a premium in the secondary market).

Rule 2790 contains three general prohibitions:

There are three exceptions to the general prohibitions. First, sales or purchases from one member of a selling group to another that are incidental to the distribution of a new issue to a non-restricted person at the offering price are not prohibited.

Second, sales or purchases of a new issue by a broker-dealer at the offering price that are part of an accommodation to a non-restricted customer of the brokerdealer are not prohibited.

Third, purchases of new issues at the offering price by broker-dealers (or owners of broker-dealers) which are organized as investment partnerships are not prohibited, provided that such purchases are credited to the capital accounts of the partners. This provision is meant to allow investment partnerships (i.e., hedge funds) that are registered as broker-dealers, or that have brokerdealer subsidiaries, to purchase new issues on the same terms as other investment partnerships.

Rule 2790 prohibits an NASD member from selling a new issue to any account unless, within the previous twelve months, it has obtained a representation from either (1) the beneficial owners of the account that the account is eligible to purchase new issues in accordance with Rule 2790, or (2) certain "conduits" (such as a bank, foreign bank, broker-dealer or investment advisor) that all purchases of new issues comply with the rule. The rule provides specific guidance regarding the appropriate type of representations required in a fund-of-funds context.

Rule 2790 contains exemptions that generally involve sales to entities that have numerous beneficial owners. Rule 2790 will not apply to sales to the following persons or accounts:

• an account in which the beneficial interests of restricted persons do not exceed, in the aggregate, 10% of such account (the "de minimis" exception),

• certain publicly traded entities (other than broker-dealers or affiliates of broker-dealers, if such broker-dealers are authorized to engage in public offerings of new issues either as selling group members or underwriters) that are listed on a national securities exchange or the Nasdaq National Market³ ,

• registered investment companies,

• certain insurance company general, separate or investment accounts,

• certain foreign investment companies, provided that no person owning 5% or more of the investment company is a restricted person, and

• certain common trust funds, ERISA benefits plans not sponsored by a broker-dealer, state or municipal government benefits plans, taxexempt charitable organizations, and church plans.

The prohibitions of Rule 2790 do not apply to new issues that are specifically directed by the issuer of the securities to restricted persons. The issuer-directed exemption applies to sales to broker-dealer personnel and finders and fiduciaries, if those persons, or members of their immediate families, are employees or directors of the issuer or its affiliated companies. Issuer-directed securities are no longer subject to a lock-up restriction.

There are other exemptions under the rule, all of which are subject to a variety of conditions and limitations, including, in some cases, lock-up restrictions. These include:

• new issues distributed pursuant to a share purchase program sponsored by an issuer or an affiliate of the issuer,

• purchase and sale of new issues by an account in which a restricted person has a beneficial interest in order to maintain the equity ownership position of the restricted person, and

• retention by an underwriter, pursuant to an underwriting agreement, of a portion of a new issue in its investment account if it is unable to sell that portion to the public. However, Rule 2790 does not permit an NASD member to place unsold shares into an account of another restricted person (other than the investment account of the underwriter).

NASD Conduct Rule 2710, commonly known as the "corporate financing rule," which regulates underwriting compensation arrangements in public offerings, was recently amended to more accurately reflect current investment banking and underwriting practices. In particular, the amended rule, effective March 22, 2004, significantly modifies the NASD’s regulation of underwriting compensation in connection with a public offering.

The amended corporate financing rule contains a more objective standard for NASD members and the NASD to use to determine whether "items of value" must be included in the calculation of underwriting compensation under the rule. "Items of value" received by an underwriter, and arrangements entered into for future receipt of items of value, during the 180 days immediately preceding the filing date of a registration statement until the date of effectiveness of the registration statement (or the commencement of sales) will be deemed to be underwriting compensation, unless received in a transaction that meets one of five exceptions contained in the rule.The amended rule also lists certain securities, fees and expenses that are excluded from the definition of "items of value" and, accordingly, are not deemed underwriting compensation or subject to the rule’s lock-up restrictions. Generally, items of value received by an underwriter before the commencement of the 180-day review period and after completion of the public offering will not be included in underwriting compensation.

The types of items of value that, if received during this period, will constitute underwriting compensation include:

• discounts and commissions,

• reimbursement of expenses on behalf of the underwriter, underwriter’s counsel and a qualified independent underwriter,

• finder’s fees, wholesaler’s fees, financial consulting and advisory fees and special sales incentive items,

• common or preferred stock, options, warrants and other equity securities, including debt securities convertible into or exchangeable for equity securities,

• any right of first refusal provided to any participating member to underwrite or participate in future public offerings, private placements or other financings that will have a compensation value of 1% of the offering proceeds or that dollar amount contractually agreed to by the issuer and underwriter to waive or terminate the right of first refusal,

• compensation to be received by the underwriter or by any person nominated by the underwriter as an advisor to the issuer’s board of directors in excess of that received by other members of the board of directors,

• commissions, expense reimbursements or other compensation to be received by the underwriter as a result of the exercise or conversion within twelve months following the effective date of the offering of warrants, options, convertible securities or similar securities distributed as part of the public offering,

• fees of a qualified independent underwriter, and

• compensation, including expense reimbursements, previously paid to any member in connection with a proposed public offering that was not completed, unless the member does not participate in the revised public offering.

The following items will not be considered underwriting compensation under the amended rule:

• listed securities purchased in public market transactions,

• nonconvertible or nonexchangeable debt securities and derivative instruments if acquired or entered into for a "fair price," in the ordinary course of business and in transactions unrelated to the public offering,

• securities acquired through stock bonus, pension or profit-sharing plans that qualify under Section 410 of the Internal Revenue Code and shares of an investment company registered under the Investment Company Act of 1940,

• cash compensation for acting as placement agent for a private placement offering or for providing a loan or credit facility or for services in connection with mergers and acquisitions, and

• expenses normally borne by the issuer (e.g., printing costs, SEC and NASD filing fees, "blue sky" registration fees) even if an underwriter pays those expenses and is subsequently reimbursed by the issuer.

• securities received in bona fide capitalraising transactions, including:

The rule amendments narrow the application of the lockup restriction to public equity offerings. Subject to certain exceptions, any common or preferred stock, options, warrants and other equity securities of the issuer that are unregistered and acquired by an underwriter or related person within 180 days before the filing of the registration statement, acquired after the filing of the registration statement and deemed to be compensation by the NASD, or acquired in transactions that meet the requirements of the five exceptions for bona fide capital-raising transactions discussed above, are subject to a 180-day lock-up restriction. For 180 calendar days following effectiveness or commencement of the public offering, these securities may not be disposed of in any manner, unless covered by one of the rule’s exceptions to the lockup restrictions.

The rule amendments eliminate the requirement to file information of the NASD affiliation or association of every shareholder of the issuer with the NASD. Instead, the amended rule requires NASD members to file with the NASD only information on the NASD affiliation of any: (i) officer or director of the issuer; (ii) beneficial owner of 5% or more of any class of the issuer’s securities; and (iii) beneficial owner of the issuer’s unregistered equity securities purchased during the 180-day period immediately preceding the filing date of the public offering (except purchases through an issuer’s employee stock purchase plan).

GUIDANCE ON ISSUER STOCK REPURCHASES SAFE HARBOR

On May 18, 2004, the staff of the SEC’s Division of Market Regulation provided answers to frequently asked questions ("FAQs") concerning recently-amended Exchange Act Rule 10b-18, the "safe harbor" for issuer repurchases. The FAQs are available at http://www.sec.gov/ divisions/marketreg/r10b18faq0504.htm. For additional information regarding amended Rule 10b-18, please refer to the article entitled "SEC Amends Stock Repurchase Safe Harbor" contained in our Winter 2004 Capital Markets and Securities Bulletin, which is available at http:// www.vedderprice.com/docs/pub/84f35d79-0c42-4431- b9e7-39c0620de80e_document.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.