Category — Corporate

The Emergency Economic Stabilization Act of 2008 (the “Act”) may result in additional relief for companies required to use “mark-to-market” accounting.  Under the Act, the Securities and Exchange Commission (SEC) is authorized to suspend mark-to-market accounting, which many have claimed has contributed to the financial crisis by requiring companies to write down assets to fire-sale prices due to the illiquidity of many trading markets.  The Act also requires the SEC, in consultation with the Federal Reserve and the Treasury Department, to conduct a study of mark-to-market accounting as it applies to financial institutions and to report to Congress within 90 days.

• SEC Authority to Suspend Mark-to-Market Accounting.The Act authorizes the SEC to suspend for any issuer or with respect to any class or category of transaction the application of Statement of Financial Accounting Standards No. 157 (”FAS 157″) if the SEC determines that the suspension is in the public interest and consistent with the protection of investors.
• While the legislation affirms the authority of the SEC to suspend mark-to-market accounting, the SEC has not indicated whether or not it will do so. Earlier this week, the SEC issued interpretive guidance on FAS 157 that affords greater flexibility to banks and other holders of illiquid securities in estimating asset values. (To see our client alert summarizing the guidance, click here.) Also earlier this week, the Financial Accounting Standards Board (FASB) proposed FSP FAS 157-d, which provides an illustration to aid practitioners in estimating the fair value of assets in markets that are not active pursuant to FAS 157. FASB announced that it would shorten its usual comment period for proposals, thereby allowing FASB to act after only a seven-day comment period. The comment period will expire on October 9, and an FASB board meeting will be held on October 10 in hopes of finalizing the guidance. FASB also announced that if FSP FAS 157-d is finalized, the guidance would be effective upon issuance, and entities with a calendar year-end would apply the guidance in their third-quarter financial statements.
• Study of FAS 157. The Act requires the SEC, in consultation with the Federal Reserve Board and the secretary of the Treasury, to conduct a study of FAS 157 as it applies to financial institutions. The study must consider (1)the effects of mark-to-market accounting on a financial institution’s balance sheet, (2)the impact of mark-to-market accounting on bank failures and on the quality of financial information available to investors, (3)the process used by the FASB in developing accounting standards, (4)the advisability and feasibility of modifying those standards and (5) alternative standards to FAS 157. The SEC must submit a report of its study to Congress within 90 days, including any administrative and legislative recommendations the SEC determines appropriate.

If you have questions regarding this post, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

The Securities and Exchange Commission (SEC) has extended its emergency order relaxing the requirements of Rule 10b-18 under the Securities Exchange Act of 1934.  The order is now scheduled to expire on October 17, 2008.  Although these temporary rules make it easier for companies to come within the safe harbor from the anti-manipulation provisions of the Exchange Act, companies should note that stock repurchase programs are still subject to the anti-fraud provisions of the securities laws.  The anti-fraud provisions prohibit companies from repurchasing shares if they are in possession of any material nonpublic information.  This could create a problem for some companies, particularly those whose fiscal quarter ended September 30 and whose earnings have not yet been released, to the extent such information could be considered material.  Such companies may need to release their earnings earlier than usual or otherwise ensure they do not possess material nonpublic information if they want to take advantage of this temporary relief for issuer stock repurchases.

Since the SEC issued the emergency order, several companies have announced stock repurchase programs, presumably to take advantage of the relaxed safe harbor provisions.  Since the SEC issued this emergency order, Microsoft announced a program to repurchase up to $40 billion in shares, Nike announced a similar program to purchase up to $5 billion in shares and 3Com announced a program to purchase up to $100 million in shares.  Several smaller companies have also commenced programs that will allow them to take advantage of the emergency conditions to the safe harbor.

As a reminder, the SEC’s emergency order temporarily relaxes certain timing and volume conditions of Rule 10b-18.  First, the emergency order suspends the timing conditions found in Rule 10b-18, such that the issuer repurchasing shares is permitted to make the opening purchase reported in the consolidated transaction or quotation reporting system and is also permitted to effect purchases up to the scheduled close of the market.  In addition to the relaxed timing conditions, the emergency order increases the daily volume of shares that issuers may purchase to 100 percent of the average daily trading volume for the security, compared to 25 percent as provided for in Rule 10b-18.

This emergency order became effective at 12:01 a.m. on September 19, 2008, and was originally set to expire at 11:59 p.m. on October 2.  Pursuant to the SEC’s extension, the order will now expire at 11:59 p.m. on October 17, 2008.

(See a client alert summarizing the recent SEC Emergency Orders, including the order regarding Rule 10b-18, here.)

If you have questions regarding this post, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

This posting briefly summarizes the key provisions of the Emergency Economic Stabilization Act of 2008 (the “Act”), which, after being passed by the Senate on October 1, 2008, was passed by the House and signed by President Bush on October 3, 2008.  The Act will, among other things, “immediately provide authority and facilities that the Secretary of the Treasury can use to restore liquidity and stability to the financial system of the United States.”  Section 2(1).

General Provisions

The Act grants the Secretary of the Treasury (the “Secretary”) authority to establish a troubled asset relief program (the “program”) to purchase, and to make and fund commitments to purchase, “troubled assets” from any “financial institution.”  Section 101(a)(1).  “Troubled assets” include “residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008,” as well as any other financial instrument that the Secretary, in consultation with the Chairman of the Board of Governors of the Federal Reserve System, deems “necessary to promote financial market stability,” so long as such determination is transmitted in writing to certain congressional committees.  Section 3(9).  A “financial institution” is “any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State . . . and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.”  Section 3(5).

The Act grants the Secretary authority to purchase up to $700 billion of troubled assets under the program.  The authority to spend $250 billion goes into effect immediately.  Section 115(a)(1).  The President may increase the limit to $350 billion at any time by submitting a written certification to Congress.  Section 115(a)(2).  Authority to spend the final $350 billion goes into effect if the President submits to Congress a written report detailing the Secretary’s plan to spend it, unless Congress enacts a joint resolution disapproving of the plan within fifteen days of such submission.  Section 115(a)(3), (c)(1).

The Secretary’s authority under the program expires on December 31, 2009.  Section 120(a).  The Secretary may, however, extend the authority to no later than two years from the date of enactment by submitting a written certification to Congress.  Section 120(b).
[Read more →]

On October 1, 2008, the Securities and Exchange Commission (SEC) issued a press release announcing that it will extend its emergency orders that impose restrictions and reporting requirements on certain short selling activities and relax certain conditions on issuer share repurchases. At the time of the publication of this alert, two orders extending the effectiveness of the issuer repurchase rule and Rule 204T of Regulation SHO, have been issued.

This alert is published by Akin Gump’s corporate and investment funds practices. To read the full alert please click here.

If you have questions regarding this alert, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York

On September 29, 2008, the U.S. Treasury Department (Treasury) announced that its Temporary Guarantee Program for Money Market Funds was now in effect and published additional guidance on the program.  The program provides a guarantee for shares held by investors in eligible money market mutual funds as of September 19, 2008.  To be eligible for this program, money market mutual funds must:

• be regulated under Rule 2a-7 under the Investment Company Act of 1940
• maintain a stable share price of $1.00
• be publicly offered and registered with the Securities and Exchange Commission
• apply to be included in the program by October 8, 2008.

The program includes both taxable and non-taxable funds.  The program is effective until December 18, 2008, but can be extended by the Secretary of the Treasury if necessary, but in no event will the program extend beyond September 19, 2009.  Links to the Treasury’s announcements of the guarantee program, as well as related FAQs, are attached below.

• September 19 announcement of guarantee program can be accessed here.
• September 21 announcement clarifying guarantee program can be accessed here.
• September 29 announcement opening guarantee program can be accessed here.
• September 29 FAQs about guarantee program can be accessed here.

For more information, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Rosa Testani, 212.872.8115, New York

On September 18, 2008, to stem the tide of waning investor confidence caused by recent volatility in the securities of financial institutions, the Securities and Exchange Commission (SEC) issued an emergency order prohibiting short sales of the securities of 799 financial institutions.  On September 21, citing difficulties with the classification criteria that led to the omission of firms that should have appeared on the list, the SEC amended the order.  Pursuant to the amended order, the SEC authorized exchanges, including the New York Stock Exchange, American Stock Exchange, and NASDAQ, to select additional companies to be placed on the list based on the exchanges’ familiarity with the nature of the businesses of their listed companies.  To be included on the list, the amended order requires that companies fall within one of the following categories:

• banks, as defined in 15 U.S.C. 78c(a)(6)
• savings associations, as defined in 15 U.S.C. 78c(a)(46)
• registered brokers or dealers, as defined in 15 U.S.C. 78c(a)(48)
• insurance companies, as defined in 15 U.S.C. 80a-2(a)(17)
• institutions similar to the above companies that are regulated by a foreign regulatory authority
• US and foreign investment advisors, registered or unregistered
• companies that control or have majority ownership of companies that are any of the above.

Since the issuance of the amended order, the list has grown from 799 institutions to approximately 1000, many of which are not traditional financial institutions.  Several of the companies on the expanded list, including IBM, General Motors, CVS Caremark, Ford Motor Company and Sears Holding Corporation, qualify because they have subsidiaries that fall within one of the listed categories or because a portion of their business operates as a financial institution.

At this rate and under these conditions, the list may grow as more and more companies ask to be included on the list.  To be added to the list, a company must submit an explanation to the stock exchange as to why it qualifies for inclusion.  The SEC’s emergency order is effective until October 2, 2008, unless further extended by the SEC.

Click here for a consolidated list of the securities covered by the short-sale prohibition for all exchanges.

For more information, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Rosa Testani, 212.872.8115, New York

The Securities and Exchange Commission (SEC) has taken several emergency actions over the last week in an effort to restore confidence in the financial markets.  The emergency orders began on September 17, 2008, with the SEC taking action to curb naked short selling of securities (SEC Release No. 34-58572 September 17, 2008). The SEC took further action on September 18, 2008, with the issuance of three emergency orders relating to—

• A prohibition of short sales in certain financial stocks (SEC Release No. 34-58592 September 18, 2008),
• A requirement to report, on a weekly basis, daily short sales by institutional investment managers who currently file reports on Form 13F (SEC Release No. 34-58591 September 18, 2008) and
• Changes to certain timing and volume conditions on issuer repurchases under Rule 10b-18 of the Securities Exchange Act of 1934 (SEC Release No. 34-58588 September 18, 2008).

The SEC subsequently issued certain technical amendments to the orders relating to 13F filers and the prohibition on short sales in financial stocks on September 21, 2008 (SEC Release No. 34-58611, SEC Release No. 34-58591A).  In an effort to clarify this recent activity, this alert summarizes the current status of the SEC’s emergency actions.

See the full alert here.

If you have questions regarding this alert, please contact—

• Patrick J. Dooley, 212.872.1080, New York
• Bruce S. Mendelsohn, 212.872.8117, New York
• Eliot D. Raffkind, 214.969.4667, Dallas
• Stephen M. Vine, 212.872.1030, New York
• Richard B. Zabel, 212.872.8060, New York