Financial Regulatory Forum

Westlaw Business Analysis: SEC Cracks Down on Holdback of Material Schedules

December 23, 2009

WLB-logoWestlaw  business applies a legal lens to the SEC’s latest moves
By J. G. Ballard
Perhaps influenced by the controversy over Bank of America’s forgotten bonus schedule from Merrill, the SEC seems to be cracking down in incomplete submission of agreements. Of over 50 such requests by the regulator since 2002, more than half have been from the past year.  As companies are now thinking through how to disclose their deals, including those with particularly sensitive commercial terms, they should keep the SEC’s newest disclosure mandate sharply in mind, in a quest to hold down comments and the time and costs they impose.
In one example of the SEC’s recent action, the Commission asked Abitibi to re-file multiple agreements, this time with all schedules, annexes and exhibits attached. The agreements ranged from restructuring agreements to purchase agreement to credit agreements.
Abitibi is not the only distressed issuer to receive this request from the SEC. XL Capital recently saw a request for a previously filed agreement in July. In XL’s case, the request was for a complete copy of the master commutation, release and restructuring agreement filed a year previously in relation to XL spinning off Syncora. While reviewing XL’s 10-K, the SEC noticed some irregularities in the accounting concerning the spin-off transaction; namely, where XL recorded the loss due to the completed transaction. This lead to additional staff comments and a request for the agreement in its entirety.
Unlike Abitibi and XL, some issuers, such as Cenveo, Inc. a paper manufacturer, try to reason their way out of the additional disclosure. Cenveo had filed an amended credit agreement with several exhibits omitted. The SEC noticed the omission and requested that the agreement be filed in its entirety. The issuer responded to the request by notating that the missing forms were not material in and of themselves as their use was contingent on events that might not even occur. The SEC stuck to its guns and again requested the complete agreement in their reply at the end of July.
While not unheard of, such requests by the SEC are also not common. This recent trend may have been triggered by the past year’s infamous Bank of America/Merrill Lynch bonus scandal. As was revealed in subsequent litigation, bonus payments were disclosed on a schedule to the merger agreement. While the merger agreement was filed, the bonus payment schedule was not.
The SEC staff appears to have a renewed interest in Item 601 of Regulation S-K, judging from the increase in requests for complete agreements. What remains to be seen is if this recent trend will continue into next year.

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