Joseph Magnas - XXBRL presentation (March 1, 2011) 1


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Joseph Magnas - XXBRL presentation (March 1, 2011) 1

  1. 1. Regulatory Implications ofXBRL and other Legal Updates © 2011 Morrison & Foerster LLP | All Rights Reserved | March 1, 2011 Tel Aviv Stock Exchange Visitor Center Joseph R. Magnas Co-Head of Israel Desk Morrison & Foerster LLP
  2. 2. OverviewScope: This presentation applies to operating companies; there are separate rules for mutual funds and nationally recognized statistical rating organizations (NRSROs).Topics: Introduction to EDGAR; Why interactive information? What Exchange Act filings need to be accompanied by Interactive Data? What Interactive Data must be tagged? Web site posting of Interactive Data Quality of Data; Validation & Acceptance Who is required to provide interactive information? When? Liability Officers Certifications XBRL in registration statements IPO exception Price range requirement and pre-effective amendments Grace period for registration statements Incorporation by reference considerations Form eligibility consequences Impact on due diligence in public offerings Dodd-Frank IssuesThis is MoFo. 2
  3. 3. EDGAR EDGAR is the SEC’s Electronic Data Gathering, Analysis and Retrieval system. EDGAR performs automated collection, validation, indexing, acceptance and forwarding of submissions by companies and others. The purpose is to increase the efficiency and fairness of the securities market. Not simply a data base; allows for specialized research of particular companies and the public market as a whole.This is MoFo. 3
  4. 4. Why Interactive Information? The SEC’s goal is to “promote efficient and transparent capital markets.” Using interactive data, an investor can immediately pull out specific information and compare it to information from other companies, performance in past years, and industry averages. Requiring the filing of interactive data makes available ways to assess data that has always been generally available only to large institutional investors. The availability of interactive data to the SEC’s staff may also enhance its review of company filings. According to the SEC, after the FDIC required submission of interactive data by banks, it reported that its analysts were able to increase the number of banks they reviewed by 10% to 33%, and that the number of bank reports that failed to fully meet filing requirements fell from 30% to 0%. The SEC noted in citing the statistics, the data required to be provided by the FDIC is more structured and less varied than the interactive data required to be provided by the SEC and, accordingly, the FDIC should have be able to realize greater efficiency than the SEC.This is MoFo. 4
  5. 5. What Exchange Act Filings Must be Tagged? Exchange Act form types potentially requiring interactive data:  Quarterly Report on Form 10-Q  Annual Report on Form 10-K  Annual Report on Form 20-F  Annual Report on Form 40-F  Forms 8-K and 6-K if financial information is included. Not required on Exchange Act Registration Statements filed on the following forms:  Form 10  Form 20-F  Form 40-FThis is MoFo. 5
  6. 6. What Interactive Data Must be Filed? The financial statements and other financial data; not the MD&A, executive compensation sections and other financial, statistical or narrative disclosure.  Balance Sheet  Income Statement  Statement of Comprehensive Income  Statement of Cash Flows  Statement of Stockholders’ Equity  Financial Statement footnotes and schedules  Block text (year one only)  Detailed tagging (after year one)  Optional tagging of narrative information The voluntary program did not require filers using U.S. GAAP or FPIs using IFRS to provide tagged data for the footnotes and schedules at all; final rule does require such disclosure to be tagged, subject to the phase-in described below regarding the extent of footnote tagging. Interactive data should be that of the filer, or at least one of the filers for filings with multiple filers. If a filer includes separate financial statements of its parent in a filing for which the parent is not a filer, the filer may not tag the parent’s financial data.This is MoFo. 6
  7. 7. Footnote and Schedule TaggingBlock Tagging in Year One Entire footnotes tagged as a single block of text. Entire financial statement schedules tagged as a block of text.Detailed Tagging in Year Two and Beyond Entire footnotes tagged as a single block of text. Significant accounting policies in the applicable footnote tagged as a single block of text. Tables within each footnote tagged as a separate block of text. In each footnote, each amount (i.e. monetary value, percentage, and number) separately tagged. Optional tagging of narrative disclosure using U.S. GAAP or IFRS taxonomies. In each financial statement schedule, each amount (i.e. monetary value, percentage, and number) separately tagged.This is MoFo. 7
  8. 8. Who and When? domestic and foreign Large Accelerated Filers using quarterly report on Form 10-Q or annual report on Form U.S. GAAP with worldwide public common equity float 20-F or Form 40-F containing financial statements for a above $5 billion as of the end of the second fiscal fiscal period ending on or after June 15, 2009 quarter of their most recently completed fiscal year all other Large Accelerated Filers using U.S. GAAP quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15, 2010 all remaining filers using U.S. GAAP quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F containing financial statements for a fiscal period ending on or after June 15, 2011 foreign private issuers with financial statements annual reports on Form 20-F or Form 40-F for fiscal prepared in accordance with IFRS as issued by the IASB period ending on or after June 15, 2011This is MoFo. 8
  9. 9. Who and When (cont.)?Domestic and Foreign Large Accelerated Filers. Domestic Large Accelerated Filers, and foreignLarge Accelerated Filers that use U.S. GAAP, with a worldwide public common equity float above $5billion as of the end of the second fiscal quarter of the most recently completed fiscal year arerequired provide to the SEC an exhibit with interactive financial data with the filer’s Securities Actregistration statement, quarterly, if applicable, and annual reports, transition reports and any reportson Form 8-K or 6-K that contain revised or updated financial statements. The requirementcommenced with the first 10-Q, 20-F or 40-F containing financial statements for a fiscal periodended on or after June 15, 2009 (generally, the Form 10-Q for the second fiscal quarter of 2009 formost filers in this category).All other Large Accelerated Filers using U.S. GAAP. Remaining domestic and foreign LargeAccelerated Filers have the same requirements but with respect to fiscal periods ended on or afterJune 15, 2010 (generally, the Form 10-Q for the second fiscal quarter of 2010 for most filers in thiscategory).All remaining filers using U.S. GAAP. All other filers using U.S. GAAP must file the same exhibitswith the Form 10-Q for fiscal periods ending on or after June 15, 2011 (generally, the Form 10-Q forthe second fiscal quarter of 2011 for most filers in this category).Foreign private issuers with financial statements prepared in accordance with IFRS as issued by theIASB. All foreign private issuers that prepare their financial statements in accordance with IFRSmust file the same exhibits for fiscal periods ending on or after June 15, 2011 (generally, the Form20-F for the year ending 2012 for most filers in this category).This is MoFo. 9
  10. 10. Who and When? (cont.) A filer first assesses its filing status at the end of each fiscal year (by looking to itspublic float as of the end of the most recently completed second quarter) and thenfollows the phase-in provisions for that status in the filings it makes during theimmediately following fiscal year. So, a filer may have to start submitting interactivedata with an annual report in some situations. This acceleration applies to the detailedtagging as well—the filer will have to include detailed tagging with the Annual Report. Ifa filer experiences a drop in status, it may be able to skip providing interactive data forcertain periods. Assume ABC Co., company with a fiscal year ending December 31, completes an IPOin July 2009. Under the definition of “Large Accelerated Filer,” the determination ofwhether a filer is a Large Accelerated Filer is made at the end of a fiscal year based onthe size of the public float of the filer at the end of the most recently completed secondfiscal quarter. In ABC’s case, at 12/31/2009, the calculation would find it not to be aLarge Accelerated Filer as at the end of 2Q09, it was still a private company. Assumingat 12/31/2010 it was a Large Accelerated Filer, then it would be required to provideinteractive financial data for the first time with its 10-Q for 1Q11. These new requirements do not affect a filer’s requirement to file and provide financialstatements and any required financial statement schedules in the traditional formats.This is MoFo. 10
  11. 11. Who and When? (cont.)The interactive data exhibits are due at the same time the relatedreports or registration statements are filed, with the followingexceptions: • The initial interactive data exhibit of a filer is required within 30 days of the due date or filing date, as applicable. • A 30-day grace period is also available for the detailed tagging required in year 2.This is MoFo. 11
  12. 12. Web Site Posting Requirement Each filer covered by the rules must provide the same interactive data that it is required to provide to the SEC on its corporate Web site, if it has one, on the earlier of the calendar day it filed (or was required to file) the related registration statement or report, as applicable. The interactive data should be accessible through the issuer’s Web site address the issuer normally uses to disseminate information to investors. Finally, the interactive data will be required to be posted for at least 12 months, which is consistent with issuers’ full one year reporting cycle. Filers can not comply with the Web posting requirement by including a hyperlink to the SEC’s Web site, which is not the case with other web posting requirements. In the adopting release, the SEC claimed that this is another incentive for issuers to add content to or otherwise enhance their Web sites, thereby improving investor experience.This is MoFo. 12
  13. 13. Quality of the Data To help ensure that interactive data meets investor expectations of reliability and accuracy, filers are expected to have policies and procedures in place, and the SEC will apply its own technology. Market forces and the liability provisions of the federal securities laws are expected to help further those goals. In the adopting release, the SEC stated that it plans to use validation software to check interactive data for compliance with many of the applicable technical requirements and to help the SEC identify data that may be problematic. The SEC further stated that it expects its technology to:  check if required conventions (such as the use of angle brackets to separate data) are applied properly for standard and, in particular, non-standard special labels and tags;  identify, count, and provide the staff with easy access to non-standard special labels and tags;  identify the use of practices, including some practices contained in the XBRL U.S. Preparers Guide, that enhance usability;  facilitate comparison of interactive data with disclosure in the corresponding traditional format filing;  check for mathematical errors; and  analyze the way that companies explain how particular financial facts relate to one another.This is MoFo. 13
  14. 14. Validation/acceptance issues The SEC applies a validation procedure to incoming interactive data submissions.  A major error will cause the exhibit to be suspended The remainder of the filing will be accepted if there are no non-XBRL errors The filer must revise the exhibit to fix the errors and resubmit the interactive data using an amendment to the prior filing. • A minor error will not prevent the interactive data from being accepted by EDGAR; the interactive data is disseminated along with the filing.This is MoFo. 14
  15. 15. LiabilityIn accordance with Rule 406T of Regulation S-T (the regulation that governs electronic filings with the SEC), aninteractive data file generally will be subject to the federal securities laws in a modified manner if the filer submits thefile within 24 months of the time the filer is first required to submit interactive data files but no later than October 31,2014. Basically, there is a temporary two-year phase-in; but, no matter what, filings made after October 31, 2014,are subject to full liability.Rule 406T provides that during the time a filer’s interactive data files are treated in this modified manner, they willbe:  subject to specified anti-fraud provisions except in connection with a failure to comply with the tagging requirements that occurs despite a good faith attempt to comply and is corrected promptly after the filer becomes aware of the failure;  deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act and not otherwise subject to liability under those sections;  deemed not filed for purposes of Section 18 of the Exchange Act or Section 34(b) of the Investment Company Act and not otherwise subject to liability under these sections;  and deemed filed for purposes of (and, as a result, benefit from) Rule 103 under Regulation S-T.Rule 103 of Regulation S-T protects a filer from liability and anti-fraud provisions of the federal securities laws withrespect to an error or omission in an electronic filing resulting solely from electronic transmission errors beyond thecontrol of the filer, where the filer corrects the error or omission by the filing of an amendment in electronic format assoon as reasonably practicable after the electronic filer becomes aware of the error or omission.This is MoFo. 15
  16. 16. Liability (cont.) Even if a filer elects to start providing interactive data early, the 24- month clock does not start until the filer is required to provide the interactive data. Rule 11 under Regulation S-T defines “promptly” as “as soon as reasonably practicable under the facts and circumstances at the time.” Rule 11 Nonexclusive Safe harbor: A correction made by the later of 24 hours or 9:30 a.m. on the next business day after the filer becomes aware of the need for the correction is deemed promptly made. If a filer fails to correct within the safe harbor, it may still be judged under the “facts and circumstances at the time” test.This is MoFo. 16
  17. 17. Officers Certifications The Officer certification requirements of Rules 13a-14 and 15d-14 of the Exchange Act do not cover the interactive data files.However, The preparation and dissemination of interactive data files will be part of a filer’s disclosure controls and procedures. To the extent that the preparation of interactive data files becomes integrated into the filer’s business information processing, there may be implications on internal controls no different than any other controls.This is MoFo. 17
  18. 18. XBRL in Registration Statements Registration statement form types potentially requiring interactive data:  Form S-1 (except for IPOs)  Form S-3  Form S-4 (for the issuer/acquiring company)  Form S-11  Forms F-1, F-3, F-4, F-9, F-10 Interactive data is not required as an exhibit to a Securities Act registration statement that does not contain financial statements, such as a Form S-3 or other form filed by an issuer that is eligible to and does incorporate by reference all required financial statements from its periodic reports. Canadian filers that use Canadian GAAP in their Form F-9s and F-10s are not required to provide interactive financial data. Although the registration statements described herein are required to be accompanied by interactive data, as applicable, the prospectus supplements and final prospectuses subsequently filed need not be accompanied by interactive data.This is MoFo. 18
  19. 19. XBRL in Registration Statements Financial statements must be tagged:  Balance Sheet  Income Statement  Statement of Comprehensive Income  Statement of Cash Flows  Statement of Owner’s Equity  Notes to the financial statements  Schedules Financial information not required to be tagged:  Capitalization Table  Selected Financial Data  Pro Forma Information  Acquired company financial statementsThis is MoFo. 19
  20. 20. IPO Exception Interactive data is required as an exhibit to a Securities Act registration statement that contains financial statements – such as a Form S-1 that is not incorporating filings by reference – but is not required in connection with an initial public offering. Voluntary submission of interactive data with an initial public offering is permissible, as long as:  Interactive data files are included as exhibits as soon as the registration statement contains a price or price range; and  Subsequent amendments also must include interactive data if the financial statements are changed. Transitioning to XBRL following an IPO.This is MoFo. 20
  21. 21. Price Range Requirement The rules require that interactive data be submitted with a Securities Act registration statement filing only after a price or price range has been determined.  Recognizes that most issues associated with Staff review have been resolved by the time a price or price range is included. Interactive data must be submitted at any later time when the financial statements are changed in a pre-effective amendment.  No interactive data file is required with a pre-effective amendment when there has been no change in the financial statements.This is MoFo. 21
  22. 22. Grace Period Under a “grace period” provision, required interactive data files may be submitted within 30 days after the filing date of the amendment to the registration statement including the price or price range. This is a one-time grace period for the first interactive data submission (and another grace period applies for the first time footnotes are tagged). Each filer has only one initial submission 30-day grace period, regardless of whether that initial submission is made voluntarily (i.e., in advance of its scheduled phase-in) or as required (i.e., at its scheduled phase-in).This is MoFo. 22
  23. 23. Incorporation by Reference Interactive data files that are submitted with periodic reports are incorporated by reference (as with the other exhibits) into any Securities Act registration statements that provide for incorporation by reference (e.g., Form S-1, Form S-3, Form S-8). Incorporation by reference subjects interactive data files to civil liability provisions under the Securities Act, such as Section 11. Web site-posted interactive data is not incorporated by reference into registration statements.This is MoFo. 23
  24. 24. Incorporation by Reference Interactive data files are required when providing revised financial statements that must be incorporated by reference into short-form registration statements. For the purpose of satisfying registration statement requirements, issuers need to file a Form 8-K to reflect:  Retroactively revised financial statements to report discontinued operations occurring after the year-end balance sheet;  Retroactively revised annual financial statements to reflect segment reporting changes; and  Retroactively revised annual financial statements to reflect the application of different accounting principles in accordance with FAS 154.This is MoFo. 24
  25. 25. Form eligibility consequences If a filer does not make the required interactive data submission by the required due date (or post the interactive data on the company Web site on the same calendar day), the filer will be unable to use short form registration statements on Forms S-3, F-3, or S-8.  Issuers that are unable to use short form registration also are unable to incorporate by reference certain information into Forms S-4 and F-4 (see Item 12 of Forms S-4 and F-4). Similarly, such filers will not be deemed to have available adequate current public information for purposes of Rule 144. Rule 12b-25 filings are not available if the interactive data is not ready on time. Once a filer complies with the interactive data submission and posting requirements (and assuming that the issuer is otherwise timely and current), then it will be deemed to be timely and current in its periodic reports.This is MoFo. 25
  26. 26. Form eligibility considerations Rule 201 of Regulation S-T generally provides a temporary hardship exemption from electronic submission of information, without SEC or SEC staff action, when a filer experiences unanticipated technical difficulties that prevent the timely preparation and submission of an electronic filing.  If the filer does not electronically submit the interactive data by the end of the six- business day temporary hardship period, from the seventh business day forward the filer will not be deemed current until it does electronically submit the interactive data.  Also applies with respect to web posting of interactive data.This is MoFo. 26
  27. 27. Form eligibility considerations Rule 202 of Regulation S-T provides a procedure whereby a filer can request that the SEC Staff grant a continuing hardship exemption.  The grant of a continuing hardship exemption for interactive data does not require a paper submission, and the filer will be deemed current until the end of the period for which the exemption is granted.  Rule 202 also provides that, if the exemption was granted for only a specified period rather than indefinitely, the filer will be deemed current up to the end of that period. If the filer does not electronically submit the interactive data by the end of the granted period, from the next business day forward the filer will not be deemed current until it submits the interactive data via EDGAR. This is MoFo. 27
  28. 28. Impact on due diligence in public offerings Limitation of liability during the first two years.  Rule 406T provides exemptions from specified liability provisions of the federal securities laws during the first two years after a filer is subject to mandatory interactive data requirements. During the two year period, the interactive data is not subject to Section 11 or 12 of the Securities Act.  The interactive data file is not deemed “filed” or “part of the registration statement or prospectus” for purposes of Sections 11 and 12.This is MoFo. 28
  29. 29. Impact on due diligence in public offerings Liability (including Securities Act liability with respect to registration statements) will apply for errors after the initial two-year period. Must evaluate whether errors in the interactive data file that do not appear in the official filing would be rendered immaterial by the correct information in the official filing. Evaluating the total mix of information, including both the accurate and the inaccurate information. See, e.g., Virginia Bankshares v. Sandberg, 501 U.S. 1083 (1991).This is MoFo. 29
  30. 30. Impact on due diligence in public offerings Carrying out a reasonable investigation with respect to interactive data.  Interactive data from audited financial statements – is it expertized disclosure?  Potential review of unaudited portions of the disclosure: Information in tags (e.g., labels); and Interim period financial information. • Issuer’s auditors may be called upon to tick and tie interactive data. • Use of software for detecting errors.• Although the SEC has been very clear that auditor participation in the preparation of interactive data is not required, we can expect the use of attestation engagements with accountants pursuant to which they will verify interactive data.• If the filer’s regular accountants get involved in the preparation of the interactive data, there may be independence issues (see Section 10A of the Exchange Act).This is MoFo. 30
  31. 31. Dodd-Frank Act Issues Issues in the Dodd-Frank Act that apply to FPIs Many of the Dodd-Frank changes that affect disclosure do not apply to FPIs, but there are a number of topics that may have significant effects on FPIs. Many of the provisions of the Act were directives from the U.S. Congress to the SEC or the national stock exchanges regarding desired rule making. Accordingly, the effect of many of the provisions remain unknown. The Dodd­Frank Act requires the SEC to compensate certain whistleblowers who provide original  information about violations of the U.S. federal securities laws and provides for a payment equal  to 10% to 30% of the amount of any sanctions, including disgorgement, collected in any  proceeding in which the SEC levies sanctions in excess of $1 million.  The Act also give the  whistleblowers a private cause of action against employers that retaliate against them.   Dodd­Frank requires that stock exchanges adopt listing standards requiring that a listed company  develop and implement a clawback policy that provides that in the case of an accounting  restatement due to the material noncompliance of the issuer with any financial reporting  requirement, the company will recover:  from all present and former “executive officers” (not just named executive officers);  any incentive­based compensation received in excess of what would have been paid under the accounting restatement;  during the three­year period preceding the date on which the company is required to prepare the restatement;  regardless of whether there was any fraud or misconduct involved (that is, the policy must apply to any accounting errors, intentional  or not, resulting in a material restatement).This is MoFo. 31
  32. 32. Dodd-Frank Issues (cont.) Dodd-Frank directs the SEC to issue rules requiring three new types of disclosure about compensation matters: the comparison of executive compensation and company performance; disclosure about a company’s hedging policies for employees and directors; and internal pay ratios. The first two are proxy items, which means they will not apply to most FPIs. The third, internal pay ratios, may ultimately apply to FPIs. Dodd-Frank amended the Exchange Act to include a law requiring the stock exchanges to adopt listing standards requiring each member of the compensation committee of a listed company to be an independent director. This provision will not affect those FPIs that elect not to have a fully independent compensation committee (in compliance with the rules of the exchanges). The Exchange Act also dictates the definition of independence for purposes of compensation committee membership. Dodd-Frank authorized the SEC to shorten the 10-day period in which greater than 5% beneficial owners must initially report their ownership of a company’s equity securities to the SEC on Form 13D and to no longer require these reports to be sent to the company or the national securities exchange on which the securities are traded. Non-accelerated filers and smaller company issuers were exempted from the requirement to provide an auditor attestation report on internal controls pursuant to Section 404 of the Sarbanes-Oxley Act.This is MoFo. 32
  33. 33. Dodd-Frank Issues (cont.) The jurisdictional reach of the antifraud provisions of the U.S. federal securities laws were expanded, but only with respect to actions by the United States or the SEC, not private causes of action. Jurisdiction in the United States was extended for two situations:  “conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors;” and  “conduct occurring outside the United States that has a foreseeable substantial effect within the United States.” Dodd-Frank amended the U.S. federal securities laws to explicitly provide the SEC authority to bring enforcement actions against secondary actors that “knowingly or recklessly” provide substantial assistance to another person in violating the U.S. federal securities laws. Say-on-Pay. Those companies that file a proxy must submit their executive compensation to an advisory vote of the shareholders. Not a binding vote. Frequency. The same companies must solicit a vote from their shareholders regarding how often the company must solicit the shareholder advisory vote on compensation. The choices are one, two or three years. This is binding.This is MoFo. 33
  34. 34. Joseph R. Magnas Co-Head of Israel Desk E-mail: Israel Phone: +972 (50) 971-4670 U.S. Phone: +1 (212) 336-4170 (Hebrew)This is MoFo. 34