We do not discuss the Multijurisdictional Disclosure System applicable to Canadian foreign private issuers in this Overview, or the special requirements applicable to registered "investment companies." Exchange Act Section 12(a) prohibits transactions on US national securities exchanges with respect to unregistered securities, while Section 12(b) sets out the requirement for that registration. Technically, Nasdaq is not a "national securities exchange" and the requirements of Sections 12(a) and 12(b) accordingly do not apply to securities quoted on Nasdaq. Nasdaq rules, however, require a foreign private issuer to register securities under Exchange Act Section 12(g) prior to quotation. National Association of Securities Dealers, Inc., NASD Manual, Rules 4320(a), (b) [hereinafter NASD Manual]. Section 12(g)(1) permits voluntary registration of equity securities. In the case of a foreign private issuer whose securities are quoted on Nasdaq, this threshold is $1 million, not $10 million. See Exchange Act Rule 12g-1. Exchange Act Section 12(g)(1); Exchange Act Rules 12g-1, 12g3-2(a). Exchange Act Rule 12g3-2(b)(3). Exchange Act Rule 12g3-2(b)(1)(i). Exchange Act Sections 13(a), 15(d). Form 20-F, General Instructions A(b). See also Exchange Act Rule 13a-1 (each issuer with Section 12 registered securities must file an annual report within the time period specified in the relevant form). Exchange Act Rule 13a-16(a); Form 6-K, General Instruction A. Form 6-K, General Instruction B. Note that in April 2003, US Senator Joseph R. Biden inserted comments into the US Congressional Record to the effect that the Section 906 certification was intended to apply to Form 6-K submissions containing financial statements. Legislative History of Title IX of the Sarbanes-Oxley Act of 2002, 149 Cong. Rec. S5325, S5331 (April 11 2003). The SEC has taken note of Senator Biden's comments, and although it stated that it was "concerned that extending Section 906 certifications to Forms 6-K or 8-K could potentially chill the disclosure of information by companies," it went on to comment that it was "considering, in consultation with the US Department of Justice, the application of Section 906 to current reports on Forms 6-K and 8-K and annual reports on Form 11-K and the possibility of taking additional action." Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Securities Act Release No 8238, Exchange Act Release No 47986, Investment Company Act Release No 26068 (June 5 2003). Exchange Act Section 13(b)(2)-(7); Exchange Act Regulation 13B-2. Exchange Act Section 30A. Exchange Act Section 10A. Sarbanes-Oxley Act, Section 2(a)(7) (definition of "issuer" subject to Sarbanes-Oxley). Securities Act Rule 405; Exchange Act Rule 3b-4. Instruction A to Securities Act Rule 405; Exchange Act Rules 12g3-2(a)(1), 12g5-1(a). Exchange Act Rule 12g3-2(a)(1). Id. Instruction A to Securities Act Rule 405. Instruction B to Securities Act Rule 405. Exchange Act Rule 13a-13(b)(2). Exchange Act Rule 13a-16(a)(3). Exchange Act Rule 3a12-3(b). Regulation FD, Rule 100. Id. Id. Rule 101(b)(ii). Exchange Act Rule 3a12-3(b). Note that these securities remain subject to the beneficial ownership reporting requirements of Sections 13(d) and 13(g). Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports, Securities Act Release No 8128, Exchange Act Release No 46464, Financial Reporting Release No 63 [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,724, at 86,188 (September 5 2002). Id. at 86,199. Exchange Act Rule 13a-13(b)(2). Plain English Disclosure, Securities Act Release No 7497, Exchange Act Release No 39593, International Series Release No 1113 (January 28 1998). Form 20-F refers to MD&A as "Operating and Financial Review and Prospects." See Form 20-F, Item 5. Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, Securities Act Release No 8182, Exchange Act Release No 47264, International Series Release No 1266 (January 27 2003). Commission Statements about Management's Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No 8056, Exchange Act Release No 45321, Financial Reporting Release No 61 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,617, at 85,152 (January 22 2002). Disclosure in Management's Discussion and Analysis about the Application of Critical Accounting Policies, Securities Act Release No 8098, Exchange Act Release No 45907, International Series Release No 1258 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,638, at 85,409 (May 10 2002). See also Cautionary Advice Regarding Disclosure About Critical Accounting Policies, Securities Act Release No 8040, Exchange Act Release No 45149, Financial Reporting Release No 60 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,609, at 85,097 (December 12 2001). Securities Act Rule 155(c)(3). Id. Form F-3, General Instruction I.A. Id. General Instruction I.B. Form F-2, General Instruction I. See Securities Act Rule 415. Form F-4, General Instructions B, C. Form F-6, General Instruction I.A. Mandated EDGAR Filing for Foreign Issuers, Securities Act Release No 8099, Exchange Act Release No 45922, International Series Release No 1259 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,640, at 85,471 (May 14 2002) [hereinafter EDGAR Filing Release]. See also Securities Act Regulation S-T, Rule 100(a) (Regulation S-T applies to all registrants whose filings are subject to review by the SEC's Division of Corporation Finance). Regulation S-T, Rule 101(a). Id. Rule 102(a). Id. Rule 101(b)(1). Id. Rule 101(b)(7). EDGAR Filing Release, ¶ 86,640, at 85,476. Regulation S-T, Rule 306(a). Id. Form 6-K, General Instruction D(1). Regulation S-T, Rule 306(a). Securities Act Rule 403(c)(2); Exchange Act Rule 12b-12(d)(2). Form 6-K, General Instruction D(2). Securities Act Rule 403(c)(3)(ii); Exchange Act Rule 12b-12(d)(3)(ii); Form 6-K, General Instruction D(4). Corporate Governance Rule Proposals, Exchange Act Release No 47672, Rule 303A(11) (April 11 2003). NASD Manual, Rule 4350(a). Securities Act Section 4(3). Securities Act Section 5(d)(2). Securities Act Rule 174(d). Securities Act Section 4(3). Securities Act Rule 174(b). Securities Act Rule 903 (offers and sales by an issuer or distributor); Securities Act Rule 904 (offshore resales). Securities Act Rule 902(h). Securities Act Rule 902(c)(1). Securities Act Rule 902(c) Offshore Offers and Sales, Securities Act Release No 6863, Exchange Act Release No 27942, Investment Company Act Release No 17458 [1989-1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 84,524, at 80,661 (April 24 1990) [hereinafter Regulation S Adopting Release]. More generally, the Regulation S Adopting Release makes clear that offshore transactions in compliance with Regulation S will not be integrated with concurrent registered or private offerings in the United States. Id. ¶ 84,524, at 80,681-82. See Coral Gold Corporation (available February 19 1991) [1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,707, at 78,229. Regulation S, Preliminary Note 5. Id. Preliminary Note 1. In addition, Regulation S is not available with respect to any transaction or series of transactions that, although in technical compliance with Regulation S, is part of a plan or scheme to avoid the registration requirements of the Securities Act. Id. Preliminary Note 2. Securities Act Rule 902(d). Securities Act Rule 903(b)(1). A "foreign issuer" is any foreign government or foreign private issuer. Securities Act Rule 902(e). "Substantial US market interest" is defined in Securities Act Rule 902(j). "Overseas directed offering" is defined in Securities Act Rule 903(b)(ii). The term "equity securities" is defined in Securities Act Rule 405, and includes debt securities convertible into equity securities. The term "debt securities" is defined as all securities that are not equity securities, and includes non-participating preferred stock and asset-backed securities. Securities Act Rule 902(a). Securities Act Rule 903(b)(2). The term "offering restrictions" is defined in Securities Act Rule 902(g). Securities Act Rule 903 (b)(2)(i) Securities Act Rule 902(g). Securities Act Rule 903(b)(2)(ii). Regulation S Adopting Release, ¶ 84,524 at 80,681-82. Securities Act Rule 903(b)(2)(iii). Securities Act Rule 902(f). Securities Act Rule 903(b)(3). Securities Act Rule 903(b)(3)(i). Securities Act Rule 903(b)(3)(iii). Securities Act Rule 903(b)(3)(ii). Securities Act Rule 903(b)(3)(ii)(A) and (iii)(A). Securities Act Rule 903(b)(3)(iii)(B). Securities Act Rule 903(b)(3)(ii)(B). Securities Act Rule 903(b)(3)(iv). The term "restricted securities" is defined in Securities Act Rule 144(a)(3). Securities Act Rule 905. Securities Act Rule 904(a). Securities Act Rule 904(b)(1). Securities Act Rule 904(b)(2). Securities Act Section 12(a). Regulation S Adopting Release, ¶ 84,524 at 80,681. SEC v. Ralston Purina Co., 346 US 119, 125 (1953) (the applicability of the private placement exemption "should turn on whether the particular class of persons affected needs the protection" of the Securities Act; an offering to those "who are shown to be able to fend for themselves" is a private placement). See, for example, Securities Act Release No 285, 1935 SEC LEXIS 485 (January 24 1935) (SEC General Counsel specifies four criteria to determine when a transaction qualifies as public offering: (i) the number of offerees and their relationship to each other and to the issuer; (ii) the number of units offered; (iii) the size of the offering; and (iv) the manner of the offering). Securities Act Release No 4552 (November 6 1962), 1962 Lexis 166 (all the surrounding circumstances must be considered "including such factors as the relationship between the offerees and the issuer, the nature, scope, size, type and manner of the offering"). Certain courts have held that this information must be comparable to the information investors would have received in a public offering. See, for example, Doran v. Petroleum Mgmt. Corp., 545 F.2d 893, 903 (5th Cir. 1977). Securities sold under Section 4(2) are "restricted securities" that may not be freely resold to the public. Securities Act Rule 144(a)(3). Securities Act Rule 501(a). Securities Act Rule 502(a). Securities Act Rule 502(b)(2)(i). Securities Act Rule 502(b)(2)(ii)(D). Securities Act Rule 502(b)(2)(v). Securities Act Rule 502(c). Securities Act Rule 502(d). Securities Act Rule 503. Securities Act Rule 504(b)(2). Securities Act Rule 504(a). Securities Act Rules 504(b)(1); 502(b)(1). Securities Act Rule 505(b)(2)(i). Securities Act Rules 505(b)(2)(ii); 501(e)(1)(iv). Securities Act Rules 505(b)(1); 502(b)(1). Securities Act Rule 506(b)(2)(i). Securities Act Rules 506(b)(1); 502(b)(1). Securities Act Rule 506(b)(2)(ii). "Purchaser representative" is defined in Rule 501(h). Securities Act Section 4(2); Regulation D, Preliminary Note 4. Rule 144A, Preliminary Note 6. Rule 144A(a)(1). Rule 144A(d)(1). Rule 144A(d)(2). Rule 144A(d)(3). Rule 144A(d)(4). Exxon Capital Holdings Corp. (publication available May 13 1988) 1988 SEC No-Act. LEXIS 682; Shearman & Sterling (publication available July 2 1993) Fed. Sec. L. Rep. (CCH) [1993 Transfer Binder] ¶ 76,704, at 78,039; Morgan Stanley & Co. Inc. (publication available June 5 1991) Fed. Sec. L. Rep. (CCH) [1991-1992 Transfer Binder] ¶ 76,018, at 78,884. See generally "The Section '4(1-1/2)' Phenomenon: Private Resales of 'Restricted' Securities", 34 The Business Lawyer 1961 (July 1979). Rule 144(b). Rule 144(d). Rule 144(c). Rule 144(e). Rule 144(f). Rule 144(h). Rule 144(k). Id. "Affiliate" is broadly defined to include any person that, directly or indirectly, controls an issuer. Securities Act Rule 405. Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings, Securities Act Release No 7759, Exchange Act Release No 42,054, Trust Indenture Act Release No 2378, International Series Release No 1208 [1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,214, at 82,536, 82,550 (October 22 1999) [hereinafter Cross-Border Release]. General Notes to Securities Act Rules 800, 801 and 802, Note 6. Securities Act Rule 802(a)(1). The 10% limitation does not apply in the case of an exchange offer or business combination commenced during the pendency of a prior exchange offer. Securities Act Rule 802(a)(1). Certain presumptions about the level of US ownership are available in the case of a hostile exchange offer. See Securities Act Rule 802(c). SEC Division of Corporation Finance, Manual of Publicly Available Telephone Interpretations, 3rd Supplement (July 2001), Section II.C, Question 1 ( http://www.sec.gov/interps/ telephone/ phonesupplement3.htm) [hereinafter Telephone Interpretations]. Securities Act Rule 800(h). Securities Act Rule 800(h)(3). Securities Act Rule 800(h)(1). Securities Act Rule 802(h)(2) Securities Act Rule 802(a)(2). Securities Act Rule 802(a)(3)(i). Securities Act Rule 802(a)(3)(ii). Securities Act Rule 802(a)(3)(iii). Securities Act Rule 802(b). General Notes to Securities Act Rules 800, 801 and 802, Note 8. Securities Act Rule 800(g). Cross-Border Release, ¶ 86,214, at 82,550. General Notes to Securities Act Rules 800, 801 and 802, Note 6. Securities Act Rule 801(a)(2). Securities Act Rule 800(h). Telephone Interpretations, Section II.C, Question 1. Securities Act Rule 801(a)(3). Securities Act Rule 801(a)(4)(i). Securities Act Rule 801(a)(4)(ii). Securities Act Rule 801(a)(4)(iii). Securities Act Rule 801(a)(5). Securities Act Rule 801(a)(6). Securities Act Rule 801(b). Securities Act Section 5(c). Securities Act Section 5(a)(1). Securities Act Section 5(b)(1). Securities Act Section 5(b)(2). Guidelines for the Release of Information by Issuers Whose Securities are in Registration, Securities Act Release No 5180 (August 16 1971) [hereinafter Information Guidelines]. Securities Act Rule 135(a)(1). Securities Act Rule 135(a)(2). Securities Act Rule 135e(b)(1), (2). Use of Electronic Media, Securities Act Release No 7856, Exchange Act Release No 42728, Investment Company Act Release No 24426 [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304, at 83,384 n.68 (April 28 2000) [hereinafter Use of Electronic Media Release]. Information Guidelines. Electronic Media Release, ¶ 86,304, at 83,384 Securities Act Rule 135c(a)(1). Securities Act Rule 135c(a)(2). Securities Act Rule 135c(a)(3). Securities Act Rule 135c(b). Securities Act Rule 135c(d). Form 20-F, Item 8.A.1. Id. Item 8.A.2. S-X Rule 3-02(a). Form 20-F, Instruction 1 to Item 8.A.2. Id. Instruction 3 to Item 8.A.2. The rules regarding the age or "staleness" of the required financial statements for foreign private issuers vary a great deal from those applicable to domestic issuers. Generally speaking, the financial statements for domestic issuers go "stale" at a much faster rate. Form 20-F, Item 8.A.4. The SEC will, however, waive this requirement, and apply the 15-month rule, in an initial public offering where the issuer is able to represent that it is not required to comply with this requirement in any other jurisdiction outside the United States and that complying with the requirement is impracticable and would involve undue hardship. As a result, the SEC expects that the majority of initial public offerings will be subject only to the 15-month rule. Id. Instruction 2 to Item 8.A.4; SEC Division of Corporation Finance, International Financial Reporting and Disclosure Issues, May 1 2001, Section II.A.1(c) [hereinafter International Financial Reporting and Disclosure Issues]. Form 20-F, Instruction 2 to Item 8. Id. Item 8.A.5. Id. Id. Item 3.A.1. The selected financials must include at least each of the following line items: net sales or operating revenues, income (loss) from operations, income (loss) from continuing operations, net income (loss), net income (loss) from operations per share, income (loss) from continuing operations per share, total assets, net assets, capital stock (excluding long-term debt and redeemable preferred stock), number of shares adjusted to reflect changes in capital, dividends declared per share in both the currency of the financial statements and US dollars, including the formula used for any adjustments to dividends declared, and diluted net income per share. The selected financials may also include any additional items that would enhance an understanding of the issuer's financial condition and results of operations. Id. Id. Id. Id. Item 3.B. Id. Instruction 1 to Item 3. Id. Item 17(c). Id. However, reconciliation is not required for interim financial statements included in an annual report. Simplification of Registration and Reporting Requirements for Foreign Companies; Safe Harbours for Public Announcements of Unregistered Offerings and Broker-Dealer Research Reports, Securities Act Release No 7053, Exchange Act Release No 33918, International Series Release No 653 [1993-1994 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 85,331, at 85,206, n.36 (April 19 1994) [hereinafter Simplification Release]. Form 20-F, Item 17(c). International Financial Reporting and Disclosure Issues, Section III.A.2. See also Simplification Release, ¶ 85,331, at 85,206 (adoption of requirement that reconciliation for earliest of the three years may be omitted); Form 20-F, Item 17(c)(2)(i) (reconciliation of net income of the earliest of the required three years may be omitted if that information has not previously been included in a registration statement under the Securities Act). Note that it is not permissible to present restructuring charges in the income statement as a separate caption after income from continuing operations before income taxes (that is, preceding income taxes and/or discontinued operations). Codification of Staff Accounting Bulletins, Staff Accounting Bulletin No 103, Topic 5.P.3 (May 9 2003) [hereinafter SAB 103]. When a restructuring charge is classified as an operating expense, it is generally inappropriate in the Staff's view to present a preceding subtotal captioned or representing operating income before restructuring charges, since this is not a measurement of operating results under Gaap. However, it is permissible to discuss the effect on net income and earnings per share of restructuring charges within MD&A, since in the Staff's view discussions in MD&A (and elsewhere) that quantify unusual or infrequent items are beneficial. Id. For a discussion of revenue recognition issues, see id., Topic 13. Form 20-F, Item 17(c)(2)(i). Id. Instruction 2 to Item 17. Id. Item 17(c)(2)(ii). Id. Item 17(c)(2)(iii). Id. Instruction 2 to Item 3.A. Id. Simplification Release, ¶ 85,331, at 85,206. Id. Id. n.37; International Financial Reporting and Disclosure Issues, Section III.A.3. SEC Division of Corporation Finance, Accounting Disclosure Rules and Practices: An Overview, Topic 6.III.A.2.b (March 31 2000) [hereinafter SEC Accounting Overview]. Form 20-F, Instruction 2 to Item 5. Id. SAB 103, Topic 1.D.1 For a discussion of the disclosure of loss contingencies, see id. Topic 5.Y. Form 20-F, Item 8.A.1, Item 8.A.3. S-X Rule 2-02. Form 20-F, Item 8.A.3. Id. Instruction to Item 8.A.3. See also SAB 103, Topic 1.E.2 (financial statements on which the auditors' opinions are qualified because of a limitation on the scope of the audit do not meet the requirements of S-X Rule 2-02(b); financial statements for which the auditors' opinions contain qualifications relating to the acceptability of accounting principles used or the completeness of disclosures made are also unacceptable). As an example, the SEC recently released a statement regarding certain advice rendered by The Institute of Chartered Accountants of England and Wales. The advice concerned the inclusion of certain language in audit opinions limiting the right of reliance by third parties on those opinions. The SEC made clear that such language would not be acceptable in audit reports accompanying SEC filings. See Letter from SEC Acting Chief Accountant and Director of Corporation Finance to The Institute of Chartered Accountants of England and Wales re: the Use of Clarifying Language in UK Audit Opinions (February 28 2003) ( www.sec.gov/ info/ accountants/ staffletters/ icaew022803.htm). Form 20-F, General Instruction E.(c), second paragraph. Id. S-X Rule 3-20(a). International Financial Reporting and Disclosure Issues, Section VII.C.1. S-X Rule 3-20(b). Id. Id. Id. See also International Financial Reporting and Disclosure Issues, Section VII.E (discussing issues arising from material currency devaluations after the date of the balance sheet). International Financial Reporting and Disclosure Issues, Section VII.D.1. Note that disclosure may be required about the impact of the euro conversion on items such as the business description, MD&A and market risk disclosure. Id. Section VII.D.2. Form 20-F, Item 3.A.3. Id. See id. Item 17(a) (financial statements must be included if they would be required for a registration statement on Form 10 or an annual report on Form 10-K); Form 10-K, Item 8 and Instruction 1 to Item 8 (financial statements must comply with Regulation S-X, other than S-X Rule 3-05 and S-X Article 11). See also Form F-1, Item 4(b) (requiring issuers to provide the financial statements called for by Rule 3-05). S-X Rule 11-01 also requires pro forma financial information where disposition of a "significant portion of a business" by an issuer has occurred or is probable, and that disposition is not "fully reflected" in the issuer's filed financial statements. Whether an acquisition is of a "business" should be evaluated in light of the facts and circumstances involved and whether there is sufficient continuity of the acquired entity's operations prior to and after the transactions so that disclosure of prior financial information is material to an understanding of future operations. A presumption exists that a separate entity, a subsidiary, or a division is a business. However, a lesser component of an entity may also constitute a business. Among the facts and circumstances which should be considered in evaluating whether an acquisition of a lesser component of an entity constitutes a business are: whether the nature of the revenue-producing activity of the component will remain generally the same as before the transaction; or whether any of the following attributes remain with the component after the transaction: (i) physical facilities; (ii) employee base; (iii) market distribution system; (iv) sales force; (v) customer base; (vi) operating rights; (vii) production techniques; or (viii) trade names. However, a different conclusion may be reached depending upon the customary practice for an industry or a particular issuer. For example, an issuer may be submitting a letter of intent as one of many parties in a bidding process, or a roll-up entity may routinely sign letters of intent to further its due diligence investigations of multiple potential targets, but with the acquisition of only a minority of those companies becoming probable. If the acquired business had a net loss, then the absolute value of the negative amount is generally used for the test. S-X Rule 3-05(b)(3). Note that, under Rule 3-05(b)(3), the calculation of the significance of an acquired business for purposes of determining whether separate audited financials need to be included in a registration statement (and if so, how many years) is generally made on the basis of the issuer's most recent annual financial statement. However, if the issuer has made a significant acquisition subsequent to the latest fiscal year end and filed a report on Form 8-K that included audited financial statements for that business for the periods required by Rule 3-05 and the pro forma information required by S-X Rule 11-01, the test is based upon the pro forma amounts for the latest fiscal year in the Form 8-K rather than the historical amounts for the latest fiscal year. SEC Accounting Overview, Topic 2.I.D.1.e.2. The date of an offering will be deemed to be the date of the final prospectus or prospectus supplement filed pursuant to Rule 424(b). By analogy, the pricing date would be the date of an offering in a Rule 144A transaction. Item 17(b) of Form F-4 provides some accommodations with respect to acquirees that are not reporting companies under the Exchange Act and in certain other cases where financial statements have previously been provided to security holders. In order for the pre-acquisition statements of an acquiree to be omitted from the registration statement, each of the following conditions must be met: the combined significance of businesses acquired or to be acquired for which audited financial statements cover a period of less than 9 months may not exceed 10%; the combined significance of businesses acquired or to be acquired for which audited financial statements cover a period of less than 21 months may not exceed 20%; and the combined significance of businesses acquired or to be acquired for which audited financial statements cover a period of less than 33 months may not exceed 40%. Combined significance is the total, for all included companies, of each individual company's highest level of significance under the three tests of significance (investment, assets and pre-tax income). For a serial acquirer going public, the application of SAB 103 is likely to allow for the exclusion of financial statements for an increasing number of acquired companies for each period prior to the IPO. See S-X Rule 3-05 (financial statements of acquired businesses must be prepared and audited in accordance with Regulation S-X). For example, if, at the date of acquisition, the acquired business met at least one of the conditions in the S-X Rule 1-02 definition of significant subsidiary at the 80% level, the deal team might likely conclude that the income statements of the acquired business should normally continue to be furnished for such periods prior to the acquisition as would, along with the issuer's audited financials post-acquisition, cover the equivalent of the three-year period specified in S-X Rule 3-02. The additional disclosure includes (i) material factors considered by the issuer in assessing the property, including sources of revenue (including, but not limited to, competition in the rental market, comparative rents, occupancy rates) and expense (including, but not limited to, utility rates, ad valorem tax rates, maintenance expenses and capital improvements anticipated) and (ii) an indication that, after reasonable inquiry, the issuer is not aware of any material factors relating to the property other than those discussed in (i) that would cause the reported financial information not to be necessarily indicative of future operating results. Form 20-F refers to MD&A as "Operating and Financial Review and Prospects." See Form 20-F, Item 5. Rule 408 states that "In addition to the information expressly required to be included in a registration statement, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." See also Form 20-F, General Instruction C.(c) (referring to Exchange Act Rule 12b-20, which contains substantially identical language to Securities Act Rule 408). S-X Rule 11-02(c)(1). The pro forma condensed balance sheet should be prepared as if the transaction had occurred on the date of the latest historical balance sheet. S-X Rule 11-02(b)(6). S-X Rule 11-02(c)(2). The pro forma condensed income statements should be prepared as if the transaction had taken place at the beginning of the latest financial year included in the filing. Id. Rule 11-02(b)(6). International Financial Reporting and Disclosure Issues, Section VIII.C. Id. Form 20-F, Item 17(c)(v). As discussed below under "Special Requirements for Public Offerings," while registrants in most public offerings must comply with Item 18 with respect to their consolidated financial statements, they need only comply with Item 17 with respect to any separate financial statements provided for significant acquired businesses. S-X Rule 3-05(c). SEC Accounting Overview, Topic 6.IV.A.7. In the case of a foreign private issuer, these will be the financial statements required by Item 8.A of Form 20-F. S-X Rule 3-10(a)(3). Note that S-X Rule 3-10 does not apply to credit enhancements that are not guarantees. However, in certain cases the financial condition of the party providing the credit enhancement could be material to investors and subject to disclosure. See Financial Statements and Periodic Reports for Related Issuers and Guarantors, Securities Act Release No 7878, Exchange Act Release No 43124 [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,320, at 83,711, n.50 (August 4 2000) [hereinafter Guarantors Release]. The modified financial information permitted by S-X Rules 3-10(b)-(f) is available only for "debt and debt-like securities" for which the issuer has a contractual obligation to pay a fixed sum at a fixed time, and, where the obligation is cumulative, a set amount of interest (which may be determined using an adjustable rate) must be paid. Guarantors Release ¶ 83,711, at 83,724. Under S-X Rule 3-10(h)(6), a subsidiary is "minor" if each of its total assets, stockholders' equity, revenues, income from continuing operations before income taxes, and cash flows from operating activities is less than 3% of the parent company's corresponding consolidated amount. S-X Rule 3-10(i)(12). The reconciliation may be based on Item 17 of Form 20-F. Id. Under S-X Rule 3-10(h)(1), a subsidiary is 100% owned if all of its outstanding voting shares are owned by its parent company, either directly or indirectly, including convertible securities and options to buy voting shares. A subsidiary not in corporate form is 100% owned if the sum of all interests are owned, either directly or indirectly, by its parent company, other than securities that are guaranteed by its parent and, if applicable, other 100% owned subsidiaries of its parent, and securities that guarantee securities issued by its parent and, if applicable, other 100% owned subsidiaries of its parent. Note that this standard is different from the definition of "wholly-owned subsidiary" under S-X Rule 1-02(aa), which is "a subsidiary substantially all of whose outstanding voting shares are owned by its parent and/or the parent's other wholly owned subsidiaries." The Latham & Watkins standard form indenture includes a "savings clause" to limit the guarantee to the extent necessary for the guarantee not to constitute a fraudulent conveyance under insolvency laws. This exception does not vitiate the guarantee in the view of the SEC. Guarantees may also have different subordination terms than the guaranteed security. However, pursuant to Note 3 of S-X Rule 3-10(f), if any of the subsidiary guarantees is not joint and several with the guarantees of the other subsidiaries, then each subsidiary guarantor whose guarantee is not joint and several need not include separate financial statements, but the condensed consolidating financial information must include a separate column for each subsidiary guarantor whose guarantee is not joint and several. S-X Rule 3-10(i) provides guidance for the preparation of the condensed consolidating financial information in the footnote. The column for non-guarantor subsidiaries may be omitted if the parent has independent assets or operations and the non-guarantor subsidiaries are minor. A subsidiary is an operating subsidiary if it is not a finance subsidiary (as defined below). Note 1 to S-X Rule 3-10(c) allows a conditional exemption from providing the footnote if the parent company has no independent assets or operations, the non-guarantor subsidiaries are minor, and there is a footnote to this effect in the parent financial statements that also notes that the guarantee is full and unconditional. The column for non-guarantor subsidiaries may be omitted if the parent has independent assets or operations and the non-guarantor subsidiaries are minor. A subsidiary is a finance subsidiary if it has no assets, operations, revenues or cash flows other than those related to the issuance, administration and repayment of the security being registered and any other securities guaranteed by its parent company. However, pursuant to Note 4 of S-X Rule 3-10(d), if any of the subsidiary guarantees is not joint and several with the guarantees of the parent company or the guarantees of the parent company and the other subsidiaries, each subsidiary guarantor whose guarantee is not joint and several need not include separate financial statements, but the condensed consolidating financial information must include a separate column for each subsidiary guarantor whose guarantee is not joint and several. For a finance subsidiary only, instead of providing this condensed consolidating financial information, the parent company's financial statements may included an audited footnote (if true) that parent company has no independent assets or operations, the issuer is a 100% owned finance subsidiary, the parent company and all of the parent company's subsidiaries other than the issuer have guaranteed the securities, and the guarantees are full and unconditional and joint and several. Note 5 to S-X Rule 3-10(d). The column for non-guarantor subsidiaries may be omitted if the non-guarantor subsidiaries are minor. The audited and unaudited financial statements must comply with all aspects of Regulation S-X except for the filing of supporting schedules. SAB 103, Topic 6.K.4. S-X Rule 3-09(a). Id. Form 20-F, Item 17(c)(vi). Simplification Release, ¶ 85,331, at 85,206. Guide 1 has been removed and reserved. Regulation S-K, Item 801(a). Where restrictions on the amount of funds that may be loaned or advanced differ from the amount restricted as to transfer in the form of cash dividends, the amount least restrictive to the subsidiary may be used. Redeemable preferred stocks and minority interests are deducted in computing net assets for purposes of this test. Compare Form 20-F, Item 17(b) (financial statement must disclose information "substantially similar" to financial statements complying with US Gaap and Regulation S-X) with id. Item 18 (must provide all Item 17 information plus all other information required by US Gaap and Regulation S-X unless those requirements do not apply to foreign private issuers, subject to certain exceptions). SAB 103, Topic 1.D.1. Id. Form 20-F, General Instruction E.(c). Offerings of non-convertible, investment grade securities and certain rights offerings need only comply with Item 17. Form F-1, Item 4(c); Form F-3, General Instructions I.B.2 and I.B.4. Note that, in the case of acquisitions of a foreign business, the financial statements of the acquired business need only be presented under Item 17. S-X Rule 3-05(c). Similarly, audited financial statements for a less than majority owned equity investor that is a foreign business need only comply with Item 17. Id. S-X Rule 3-09(d). SFAS 131 uses the term "chief operating decision maker" to identify a function rather than a specific person; the "chief operating decision maker" could be the CEO, CFO, or a group of senior managers, depending upon the circumstances. In practice there is a great variety of ways in which management may view its business and there is no one right answer within a given industry. For example, Dell Computer considers that its enterprise is primarily operating on a geographic basis, but with two operating segments in the United States (business and consumer); in comparison, IBM reports its results under seven operating segments based upon customers, products, technology and delivery channels. Under SFAS 131, the details provided in reporting a "measure of profit or loss" depend upon the information that is actually reviewed by the chief operating decision maker and may include revenues from external vs. internal customers, interest revenue and expense, depreciation and amortization, and extraordinary items, among others. Note that a foreign private issuer need not reconcile segment information to US Gaap in its MD&A discussion. International Financial Reporting and Disclosure Issues, Section V.A.3. In January 2003, the SEC adopted new rules limiting the use of non-Gaap financial measures that have customarily appeared in the summary financial data. See Latham & Watkins Client Alert No 257, SEC Adopts Rules for Disclosure of EBITDA and Other "Non-Gaap Financial Measures," for more information on this important topic ( http://www.lw.com/ resource/ publications/ _pdf/ pub578.pdf). This requirement applies to annual reports as well as registration statements. See also Form F-2, Item 5.a and Form F-3, Item 5.a (requiring disclosure of any material change in the issuer's affairs since the end of the last fiscal year for which certified financial statements are included in the registration statement or are incorporated by reference from the last filing on Form 20-F, to the extent those changes have not been described in a current report, such as on Form 6-K, that is incorporated in the registration statement). Form 20-F, Item 8.A.5. This requirement does not apply to annual reports. Id. Instruction 1 to Item 8.A.5. Although Item 8.A.5 refers only to interim financial statements, the SEC takes the position that this requirement applies to annual financial statements as well. International Financial Reporting and Disclosure Issues, Section VIII.A. International Financial Reporting and Disclosure Issues, Section VIII.A. Id. Regulation FD prohibits discussing material information with prospective investors unless it has been made public. Foreign private issuers are exempt from Regulation FD, but many companies attempt to comply because of liability concerns. Some companies will issue a "recent results" press release ahead of schedule in order to allow for the inclusion of these results in the offering document and a "road show" discussion of these results with prospective investors. Sarbanes-Oxley Act Section 2(a)(7). Certification of Disclosure in Companies' Quarterly and Annual Reports, Securities Act Release No 8124, Exchange Act Release No 46427, Investment Company Act Release No 25722 [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,720, at 86,132, 86,152 (August 28 2002) [hereinafter Certification Adopting Release]. Id. ¶ 86,720, at 86,126. Management's Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Securities Act Release No 8238, Exchange Act Release No 47986, Investment Company Act Release No 26068 (June 5 2003) [hereinafter Management's Reports on Internal Control Adopting Release]. Id. The SEC has stated that current reports such as those on Forms 6-K and 8-K, as opposed to periodic reports (that is, quarterly and annual reports), are not covered by Section 302's certification requirements. Certification Adopting Release, ¶ 86,720, at 86,130. Foreign private issuers are nevertheless required to design and maintain disclosure controls and procedures to ensure full and timely disclosure in current reports. Id. Exchange Act Rules 13a-14(a), 15d-14(a). Form 20-F, Instructions as to Exhibits, Instruction 12. The term "disclosure controls and procedures" is defined in Exchange Act Rule 13a-15(e) and 15d-15(e). The term "internal control over financial reporting" is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). This portion of the Section 302 certification does not take effect until the annual report on Form 20-F for the first fiscal year ending on or after April 15 2005. Management's Reports on Internal Control Adopting Release, Sections II.J, III.E. Similarly, this portion of the Section 302 certification does not take effect until April 15 2005. Id. Note, however, that no specific date for the evaluation is specified. Management's Reports on Internal Control Adopting Release, Section III.E. Exchange Act Rules 13a-14(a), 15d-14(a). Certification Adopting Release, ¶ 86,720, at 86,132. However, "a company's certifying officers may temporarily modify the content of their Section 302 certification to eliminate certain references to internal control over financial reporting until the compliance date." Management's Reports on Internal Control Adopting Release. Exchange Act Rules 13a-15(a), 15d-15(a). Exchange Act Rules 13a-15(b), 15d-15(b). Form 20-F, Item 15(a). Exchange Act Rules 13a-15(e), 15d-15(e). Pending effectiveness of Rules 13a-14(b) and 15d-14(b), the SEC has reiterated its prior guidance that an issuer should provide the Section 906 certification as an exhibit to the annual report to which it relates. Management's Reports on Internal Control Adopting Release, Section III.C. Management's Reports on Internal Control Adopting Release, Section III.B. Not "filing" will also limit enforcement of the certificate to criminal proceedings rather than civil litigation. John Huber, Thomas Kim and Catherine Groves, The Sarbanes-Oxley Act of 2002 and SEC Rulemaking, ¶ II.B.1.d, at 12 (March 28 2003) (http://www.lw.com/ upload/docs/doc33.pdf) [hereinafter Huber Outline]. Huber Outline, ¶ II.B.3.b(1), at 17. Legislative History of Title IX of the Sarbanes-Oxley Act of 2002, 149 Cong. Rec. S5325, S5331 (April 11 2003). Management's Reports on Internal Control Adopting Release, Section III.A. Huber Outline, ¶ II.B.2.b(3), at 15. Management's Reports on Internal Control Adopting Release, Section III.B. Management's Reports on Internal Control Adopting Release, Section II.J. Exchange Act Rules 13a-15(f); 15d-15(f). Exchange Act Rules 13a-15(a), 15d-15(a). Exchange Act Rules 13a-15(c), 15d-15(c). Id. Although Rules 13a-15 and 15d-15 do not require the use of a particular framework, the Committee of Sponsoring Organizations of the Treadway Commission's "Internal Control - Integrated Framework", the Canadian Institute of Chartered Accountant's "The Guidance on Assessing Control", and the Institute of Chartered Accountants in England and Wales' "Turnbull Report" are all approved frameworks. Management's Reports on Internal Control Adopting Release, at n.67. Exchange Act Rules 13a-15(d), 15d-15(d). Form 20-F, Item 15(b). Even if the evaluation framework used by a foreign private issuer does not require a statement as to the effectiveness of the issuer's system of internal control over financial reporting, the issuer must nevertheless state affirmatively whether such controls are effective. Management's Reports on Internal Control Adopting Release, n.68. Form 20-F, Item 15(c). Id. Instruction 1 to Item 15. The SEC has stated that it believes it is important for the internal control report to be located near the auditor's attestation report, and that it expects issuers will place the report and attestation near MD&A disclosure or immediately preceding the financial statements. Management's Reports on Internal Control Adopting Release, Section II.B.3.e. Form 20-F, Item 15(d). Management's Reports on Internal Control Adopting Release, Section II.F.3. Conditions for Use of Non-Gaap Financial Measures, Securities Act Release No 8176, Exchange Act Release No 47226, Financial Reporting Release No 65 (January 22 2003) [hereinafter Non-Gaap Financial Measures Adopting Release]; see also Latham & Watkins Client Alert No 257, SEC Adopts Rules for Disclosure of EBITDA and Other "Non-Gaap Financial Measures" ( http://www.lw.com/ resource/ publications/ _pdf/ pub578.pdf). Conditions for Use of Non-Gaap Financial Measures, Securities Act Release No 8145, Exchange Act Release No 46788 [2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,737, at 86,444-86,446 (November 4 2002). Regulation G, Rule 100(a). Id. Rule 101(a)(1). The term does not cover operating measures. Id. Rule 101(a)(2). Id. Rule 101(b). In addition, if the foreign private issuer prepares its primary financial statements under US Gaap, "Gaap" would mean US Gaap. Id. Id. Rule 100(a). Id. Rule 100(b). Non-Gaap Financial Measures Adopting Release. Regulation G, Rule 100(c). Non-Gaap Financial Measures Adopting Release. Regulation S-K, Item 10(e)(1)(i). Id. Item 10(e)(1)(ii). Id. Item 10, Note to Paragraph (e). See Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, Securities Act Release No 8182, Exchange Act Release No 47264, Financial Reporting Release No 67, International Series Release No 1266 (January 27 2003) [hereinafter Off-Balance Sheet Adopting Release]. Id. Form 20-F, Item 5.E.1. Id. Items 5.E.1.(a)-(d). Id. Item 5.E.2. Off-Balance Sheet Adopting Release, Sections II.B.1 and III.A.1. Id. Section III.G. Id. Form 20-F, Item 5.F.1. Id. Item 5.F.2. Off-Balance Sheet Adopting Release, Section III.D and n.73. Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations, Securities Act Release No 8056, Exchange Act Release No 45321, Financial Reporting Release No 61 (January 22 2002). Off-Balance Sheet Adopting Release, Section II.B.4. Exchange Act Rule 10A-3(a)(5)(i)(A); see also Standards Relating to Listed Company Audit Committees, Securities Act Release No 8220, Exchange Act Release No 47654, Investment Company Act Release No 26001 (April 9 2003). Exchange Act Rule 10A-3(b)(1)(i). Exchange Act Rule 10A-3(b)(1)(ii)(A). Exchange Act Rule 10A-3(b)(1)(ii)(B). Exchange Act Rule 10A-3(e)(1)(i). Exchange Act Rule 10A-3(e)(1)(ii)(A). Exchange Act Rule 10A-3(b)(1)(iv)(C). Exchange Act Rule 10A-3(b)(1)(iv)(D). Exchange Act Rule 10A-3(b)(1)(iv)(E). Exchange Act Rule 10A-3(b)(1)(iv)(A). Exchange Act Rule 10A-3(b)(2). Exchange Act Rule 10A-3(b)(3). Exchange Act Rule 10A-3(b)(4). Exchange Act Rule 10A-3(b)(5). Instruction 1 to Exchange Act Rule 10A-3. Id. Instruction 2 to Exchange Act Rule 10A-3. Exchange Act Rule 10A-3(c)(3). Exchange Act Rule 10A-3(d) and Form 20-F, Item 16.D. Id. Form 20-F, Items 16A(a)(1) and (3). Id. Instruction 3 to Item 16A. Id. Item 16A(a)(2). Id. Note that for listed issuers the audit committee financial expert will need to satisfy the definition of "independence" as set forth under Exchange Act Rule 10A-3. Id Id. Item 16A(b). Id. Item 16A(c). Id. Instruction 3 to Item 16A. Sections 406 and 407 Adopting Release, Section II.A.4.d.i. Form 20-F, Item 16A(d)(1). Id. Items 16A(d)(2)-(3). Strengthening the Commission's Requirements Regarding Auditor Independence, Securities Act Release No 8183, Exchange Act Release No 47265, Investment Company Act Release No 25915, Investment Advisers Act Release No 2103 (January 28 2003). S-X Rule 2-01(c)(2)(iii); see also Exchange Act Section 10A(l) (auditor may not audit an issuer whose CEO, controller, CFO or chief accounting officer was employed by the auditor and participated in the audit during the one-year period preceding the date of the initiation of the audit in question). S-X Rule 2-01(c)(4); see also Exchange Act Section 10A(g) (substantially identical limitations). S-X Rule 2-01(c)(6); see also Exchange Act Section 10A(j) (unlawful to act as auditor if lead (or coordinating) audit partner (having primary responsibility for the audit) or audit partner responsible for reviewing the audit has performed audit services for the issuer in the each of the prior five fiscal years of the issuer). S-X Rule 2-01(c)(7); see also Exchange Act Sections 10A(h)-(i) (all audit and permitted non-audit services must be pre-approved by the audit committee (subject to certain de minimis exceptions)). S-X Rule 2-01(c)(8). S-X Rule 2-07(a); see also Exchange Act Section 10A(k) (substantially identical requirements). Form 20-F, Item 16C(a). Id. Item 16C(b). Id. Item 16C(c). Id. Item 16C(d). Id. Item 16C(e). Id. Item 16C(f). Improper Influence on Conduct of Audits, Exchange Act Release No 47890, Investment Company Act Release No 26050, Financial Reporting Release No 71 (May 20 2003) [hereinafter Improper Influence Adopting Release]. Exchange Act Rule 13b2-2(b)(1). Improper Influence Adopting Release, Section II.B. Id. Exchange Act Rule 13b2-2(b)(2). Retention of Records Relevant to Audits and Reviews, Securities Act Release No 8180, Exchange Act Release No 47241, Investment Company Act Release No 25911, Financial Reporting Release No 66 (January 24 2003) [hereinafter Retention Release]. S-X Rule 2-06(a). The SEC required a seven-year period rather than the five-year period mandated in Section 802, because, among other things, Section 103 of the Sarbanes-Oxley Act directs the Public Company Accounting Oversight Board to require auditors to retain audit workpapers and other materials that support the audit for seven years. Retention Release, Section II. S-X Rule 2-06(b). S-X Rule 2-06(c). See Certification Adopting Release, ¶ 86,720, at 86,130. Implementation of Standards of Professional Conduct for Attorneys, Securities Act Release No 8185, Exchange Act Release No 47276, Investment Company Act Release No 25919 (January 29 2003) [hereinafter Attorney Conduct Adopting Release]. Part 205.2(a)(1). Part 205.2(a)(2)(ii). Part 205.2(j). Part 205.2(i). Part 205.3(b)(1). Part 205.3(b)(2). Part 205.3(b)(3). Part 205.3(c)(1). Part 205.2(k). Part 205.3(c)(1). Part 205.3(c)(2). Attorney Conduct Adopting Release. Sections 406 and 407 Adopting Release. Form 20-F, Item 16B(a). Id. Item 16B(b). Id. Item 16B(c). Id. Items 16B(d) and (e). Insider Trades During Pension Fund Blackout Periods, Exchange Act Release No 47225, Investment Company Act Release No 25909 (January 22 2003). The term "individual account plan" is defined in Regulation BTR, Rule 100(j). Id. Rule 100(b)(2). Id. Rule 101(a). Id. Rule 104. Form 20-F, Instructions as to Exhibits, Instruction 10. Although the issuer need not submit the notice under Form 6-K, if it does so it is not separately required to include the notice as an exhibit to its annual report on Form 20-F. Id. Regulation BTR, Rule 103(b). Id. Rule 103(a). Id. Rule 103(b). Exchange Act Section 13(k)(1). Id. Id. Exchange Act Section 13(k)(2). Exchange Act Section 13(k)(3). Sarbanes-Oxley Act: Interpretive Issues under Section 402 - Prohibition of Certain Insider Loans (October 15 2002) (http://www.lw.com/ upload/ docs/doc29.pdf). Id. at 3-4. Id. at 4. Id. Id. at 4-5. Id. at 6. Id. Id. at 8-11. See Huber Outline, ¶ V.C.1, at 77-79. Id. ¶ V.C.2, at 79. Regulation Analyst Certification, Securities Act Release No 8193, Exchange Act Release No 47384 (February 20 2003) [hereinafter Regulation AC Release]. Regulation AC, Rule 501(a). Id. Rule 500. Id. Certification is not, however, required from "junior analysts." Regulation AC Release, Section III.A.1. Regulation AC Release, at n.11. Id. Section I.A. Regulation AC, Rule 502(a). Id. Rule 502(c). Id. Rule 503. Id. Rule 500. A "foreign issuer" is any foreign government or foreign private issuer. Securities Act Rule 902(e). Securities Act Section 2(a)(3). David M. Brodsky & Daniel J. Kramer, Federal Securities Litigation, 4-16 to 4-17 (1st ed. 1997) [hereinafter Federal Securities Litigation]. Id. at 4-2 to 4-3. Id. at 5-20 (citing Pinter v. Dahl, 486 US 622, 641-54 (1988)). See TSC Indus., Inc. v. Northway, Inc., 426 US 438, 449 (1976); see also Securities Act Rule 405 ("material" information is "matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security registered"). TSC involved the interpretation of Section 14(a) of the Exchange Act and Rule 14a-9. The Supreme Court has, however, explicitly extended TSC's definition of materiality to Rule 10b-5, Basic Inc. v. Levinson, 485 US 224, 231-32 (1988), and the lower US federal courts have generally used the TSC standard in all contexts involving the anti-fraud provisions of the US federal securities laws. Louis Loss & Joel Seligman, Securities Regulation 2074-75 (3rd ed. 1992) [hereinafter Loss & Seligman]. TSC, 426 US at 449. Id. at 450. SAB 103, Topic 1.M.1 (SAB 103 recodifies Staff Accounting Bulletin 99). Id. Id. Selective Disclosure and Insider Trading, Securities Act Release No 7881, Exchange Act Release No 43154, Investment Company Act Release No 24599 [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,319, at 83,676, 83,684 (August 15 2000) [hereinafter Regulation FD Release]. In the case of an omission, a plaintiff must show that there was a duty to disclose the material facts; merely being in possession of material non-public information does not, of itself, create a duty to disclose. Federal Securities Litigation, at 6-4. Ernst & Ernst v. Hochfelder, 425 US 185, 193 (1976). Federal Securities Litigation, at 6-13 to 6-14. Id. at 6-26 to 6-27. Blue Chip Stamps v. Manor Drug Stores, 421 US 723, 754-55 (1975). Loss & Seligman, at 3679 n.553. See Loss & Seligman, at 3688 (explaining that "[t]he Rule may be violated by feeding misinformation into the marketplace, or even withholding information too long," regardless of whether the defendants themselves bought or sold securities) (citation omitted). Federal Securities Litigation, at 6-30 to 6-31. The SEC has stated that an issuer may be "fully liable" if it disseminates and adopts false third-party reports "even if it had no role whatsoever in the preparation of the report." Use of Electronic Media, Securities Act Release No 7856, Exchange Act Release No 42728, Investment Company Act Release No 24426 [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304, at 83,374, 83,381, n.54 (April 28 2000) (citing In the Matter of Presstek, Inc., Exchange Act Release No 39472 (December 22 1997)). Federal Securities Litigation, at 6-32; see also Regulation FD Release, ¶ 86,319, at 83,682 (defining a temporary insider as "a person who owes a duty of trust or confidence to the issuer," such as an attorney, investment banker or accountant). Federal Securities Litigation, at 6-32 to 6-33. Id. at 6-34. Id. at 6-34 to 6-35 (citing United States v. O'Hagan, 521 US 642 (1997)). The SEC has recently added two rules to clarify issues that have arisen in insider trading cases. First, Rule 10b5-1 provides that trading "on the basis of" material non-public information includes all trading while in possession of that information, except certain trades previously contracted for in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b5-1. Second, Rule 10b5-2 fleshes out the meaning of a "duty of trust or confidence" for purposes of the misappropriation theory. Federal Securities Litigation, at 6-34. Id. at 6-42. Exchange Act Section 21D(e)(1); see also Federal Securities Litigation, at 6-43 to 6-45 (discussing damages under Exchange Act Section 10(b)). See, for example, Exchange Act Sections 21(d)(3) (providing for money penalties in SEC civil actions), 32(a) (providing for criminal penalties for willful violations of the Exchange Act). Federal Securities Litigation, at 6-42; see also Exchange Act Section 28(a) (limiting recovery for damages in actions under the Exchange Act to "actual damages"). Federal Securities Litigation, at 3-1. See Loss & Seligman, at 4217-18. See Federal Securities Litigation, at 3-8 to 3-10. Id. at 3-11 (citing Securities Act Section 6(a)). Id. at 3-12. Id. at 3-14. Securities Act Sections 11(b)(3)(A) and (B). Securities Act Section 11(b)(3)(C). Securities Act Section 11(e). Federal Securities Litigation, at 3-19 to 3-20. Gustafson v. Alloyd Co., 513 US 561, 564, 584 (1995). There is some question whether Section 12(a)(2) liability extends to offshore public offerings under Regulation S. One lower US federal court has held that, despite Gustafson, "an offering issued pursuant to Regulation S is subject to" Section 12(a)(2) liability "if it is a public offering." Sloane Overseas Fund Ltd. v. Sapiens Int'l Corp, 941 F. Supp. 1369, 1376 (S.D.N.Y. 1996). Id. at 5-20 (citing Pinter v. Dahl, 486 US 622, 641-54 (1988)). Securities Act Rule 405; see also Exchange Act Rule 12b-2. Federal Securities Litigation, at 11-5. Id. at 11-5 to 11-7. See generally id. at 11-7 to 11-10 (discussing the defence). Huber Outline, ¶ X.A, at 134. Sarbanes-Oxley Act Section 802(a) (adding new Section 1519 of 18 USC); Huber Outline, ¶ X.A.1.a.1, at 135. Sarbanes-Oxley Act Section 1102 (amending 18 USC Section 1512); Huber Outline, ¶ X.A.1.b, at 137. Sarbanes-Oxley Act Section 1107 (amending 18 USC Section 1513); Huber Outline, ¶ X.A.2.a, at 137. Sarbanes-Oxley Act Section 807 (adding new Section 1348 to 18 USC); Huber Outline, ¶ X.A.3, at 137. Sarbanes-Oxley Act Section 1106 (amending Exchange Act Section 32(a)); Huber Outline, ¶ X.A.4.a.7, at 138. Sarbanes-Oxley Act Section 1103 (amending Exchange Act Section 21C(c)); Huber Outline, ¶ X.B.1, at 139. Sarbanes-Oxley Act Section 1105 (amending Exchange Act Section 21C and Securities Act Section 8A); Huber Outline, ¶ X.B.2.a, at 139. Huber Outline, ¶ X.B.2.a, at 139. Sarbanes-Oxley Act Section 305 (amending Exchange Act Section 21(d)(2) and Securities Act Section 20(e)); Huber Outline, ¶ X.B.2.c, at 140. Sarbanes-Oxley Act Section 806 (adding new Section 1514A to 18 USC); Huber Outline, ¶ X.C.2.a, at 141. Sarbanes-Oxley Act Section 803 (adding new Section 523(a) to 11 USC); Huber Outline, ¶ X.C.3.a, at 141. See SEC v. Murphy, [1983-84 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,688 (C.D. Ca. 1983). For a comprehensive discussion of SEC Enforcement practice, see, for example, The Securities Enforcement Manual: Tactics and Strategies (Richard M. Phillips, ed. 1997); William R. McLucas, J. Lynn Taylor & Susan A. Mathews, A Practitioner's Guide to the SEC's Investigative and Enforcement Process, 70 Temp. L. Rev. 53 (1997). See, for example, SEC v. Lernout & Hauspie Speech Products, N.V., Litigation Release No 17782 (October 10 2002) (charging Belgian corporation quoted on Nasdaq National Market System with financial fraud), available at http://www.sec.gov/litigation/litreleases/lr17782.htm; SEC v. A.C.L.N., Ltd., Litigation Release No 17776 (October 8 2002) (charging NYSE-listed Cypriot corporation and its Cypriot auditor with financial fraud), available at http://www.sec.gov/litigation/litreleases/lr17776.htm; SEC v. Millennium Financial, Ltd., Litigation Release No 17528 (May 22 2002) (charging Uruguayan securities firm with securities fraud), available at http://www.sec.gov/litigation/litreleases/lr17528.htm. See, for example, SEC v. Unifund SAL, 910 F.2d 1028, 1033 (2d Cir. 1990) (upholding preliminary injunction barring insider trading against Lebanese investment company which purchased stock in a New York Stock Exchange-listed company through Beirut office of US broker-dealer). See also Federal Securities Litigation, at 1-5 to 1-8 (discussing the extra-territorial reach of the US federal securities laws). 2002 SEC Annual Report at 13, available at http://www.sec.gov/pdf/annrep02/ar02full.pdf. For a discussion of MLATs, see Symposium, Mann, Mari & Lavdas, International Agreements and Understandings for the Production of Information and Other Mutual Assistance, 29 Int'l Law. 780, 781 n.248 and accompanying text (1995). In the Matter of E.On AG, Exchange Act Release No 43372, Administrative Proceeding File No 3-10318 (September 28 2000), available at http://www.sec.gov/litigation/admin/34-43372.htm [hereinafter E.On AG]. Id. Federal Securities Litigation, at 6-4. Id. at 6-4 to 6-5. Id. at 6-5. Regulation FD Release, ¶ 86,319, at 83,684. Note that, in the SEC's view, a research report contains an "inherent representation" that the views expressed in the report are not knowingly false and do not omit material facts necessary in order to make statements not misleading. Regulation AC Release, Section II.I. Accordingly, "analysts may be found to have violated the anti-fraud provisions of the federal securities laws if they make baseless recommendations or recommendations that they disbelieve." Id. Federal Securities Litigation, at 6-31. See generally Federal Securities Litigation, at 2-1 to 2-31 (discussing the PSLRA). Securities Act Section 27A(c)(1). Securities Act Section 27A(i)(1). Securities Act Section 27A(b)(2). Securities Act Section 27A(c)(1)(A)(i). Basic Inc. v. Levinson, 485 US 224, 230-232 (1998). Id. at 236 (quoting TSC Indus., Inc. v. Northway, Inc., 426 US 438, 450 (1976)). Id. at 238-41 (1998). Id. at 238 (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d. Cir. 1968)). See, for example, SEC v. Geon Industries, Inc., 531 F.2d 39, 47-48 (2d. Cir. 1976) ("Since a merger in which it is bought out is the most important event that can occur in a small corporation's life, to wit, its death, we think that inside information, as regards a merger of this sort, can become material at an earlier stage than would be the case as regards lesser transactions-and this even though the mortality rate of mergers in such formative stages is doubtless high."). E.On AG. See, for example, Charles Schwab & Co., Inc. (publ. avail. November 15 1999) [1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 77,650, at 76,310. For an overview, see Use of Electronic Media Release; see also Use of Internet Web Sites to Offer Securities, Solicit Securities Transactions, or Advertise Investment Services Offshore, Securities Act Release No 7516, Exchange Act Release No 39779, Investment Advisers Act Release No 1710, Investment Company Act Release No 23071 (March 23 1998) (www.sec.gov/rules/interp/33-7516.htm) [hereinafter Offshore Internet Offerings Release]. Use of Electronic Media, Securities Act Release No 7856, Exchange Act Release No 42728, Investment Co. Act Release No 24426 [2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,304, at 83,381 (April 28 2000). Id. at 83,383. Id. at 83,383-85. See Offshore Internet Offerings Release, Section IV.A.2. Use of Electronic Media Release, ¶ 86,304, at 83,384. Id. at 86,381. Id. Id. at 83,381-83,383. Offshore Internet Offerings Release, Section IV.A.1. Id. Section IV.A.2. Use of Electronic Media Release, ¶ 86,304, at 83,386. Order Approving Proposed Rule Changes by the National Association of Securities Dealers, Inc. and the New York Stock Exchange, Inc. and Notice of Filing and Order Granting Accelerated Approval of Amendment No 2 to the Proposed Rule Change by the National Association of Securities Dealers, Inc. and Amendment No 1 to the Proposed Rule Change by the New York Stock Exchange, Inc. Relating to Research Analyst Conflicts of Interest, Exchange Act Release No 45908 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,639, at 85,457 (May 10 2002). The Conflict of Interest Rules are NYSE Rule 472, Communications with the Public, and NASD Rule 2711, Research Analysts and Research Reports. Order Approving Proposed Rule Changes by the New York Stock Exchange, Inc. Relating to Exchange Rules 344 ("Supervisory Analysts"), 345A ("Continuing Education for Registered Persons"), 351 ("Reporting Requirements") and 472 ("Communications with the Public") and by the National Association of Securities Dealers, Inc. Relating to Research Analyst Conflicts of Interest and Notice of Filing and Order Granting Accelerated Approval of Amendment No 3 to the Proposed Rule Change by the New York Stock Exchange, Inc. and Amendment No 3 to the Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Research Analyst Conflicts of Interest, Exchange Act Release No 48252 (July 29 2003), 68 Fed. Reg. 45,875 (August 4 2003). These amendments to the Conflict of Interest Rules generally become effective 60 days after the approval of the rule amendments by the SEC, or September 27 2003, although certain provisions of the amendments take effect at later dates. Id. at Section III.M. Id. at Section II.B. Id. at Section II.B. NASD Rule 2711(b)(3); NYSE Rule 472(b)(3). These rules do not apply to certain small firms, which are defined as "member organizations that over the three previous years, on average per year, have participated in ten or fewer investment banking services transactions as manager or co-manager and generated $5 million or less in gross investment banking services revenues from those transactions." NYSE Rule 472(m); see NASD Rule 2711(k). NASD Rule 2711(c)(2); see NYSE Rule 472(b)(4). NASD Rule 2711(c)(2)(A); NYSE Rule 472(b)(4). NASD Rule 2711(c)(2)(B), (C); NYSE Rule 472(b)(4)(i), (ii). NASD Rule 2711(c)(3); NYSE Rule 472(b)(4)(iii). NASD Rule 2711(d)(1); see NYSE Rule 472(h)(1). Here and for all other purposes under the Conflict of Interest Rules, "research analyst" is defined to include a member, allied member, or employee of a member or member organization "primarily responsible for, and any person who reports directly or indirectly to such research analyst in connection with, the preparation of the substance of a research report, whether or not such person has the job title of 'research analyst.'" NYSE Rule 472.40; NASD Rule 2711(a)(5). NASD Rule 2711(h)(2)(A)(i)(a); NYSE Rule 472(k)(1)(ii)(a)(2) NASD Rule 2711(d)(2); NYSE Rule 472(h)(2). Id. Id. NASD Rule 2711(e); see NYSE Rule 472(g)(1). NASD Rule 2711(j); NYSE Rule 472(g)(2). NASD Rule 2711(c)(4); NYSE Rule 472(b)(5). Id. NYSE Rule 472(b)(5). The NASD Rules do not contain a comparable exception. NASD Rule 2711(f); NYSE Rule 472(f). NASD Rules 2711(f)(1)(A), (f)(1)(B), (f)(4); NYSE Rules 472(f)(1), (2) and (4). "Public appearance" is defined to include "without limitation, participation by a research analyst in a seminar, forum (including an interactive electronic forum), radio, television or print media interview, or public speaking activity, or the writing of a print media article in which such research analyst makes a recommendation or offers an opinion concerning any equity securities." NYSE Rule 472.50; see NASD Rule 2711(a)(4). The prohibitions contained in the second two bullets do not apply to public appearances or research reports published or otherwise distributed under Securities Act Rule 139 regarding an issuer with "actively-traded securities," as defined in Rule 101(c)(1) of Regulation M under the Exchange Act. NASD Rule 2711(f)(1)(B)(ii), (f)(4); NYSE Rule 472(f)(2), (4). NASD Rule 2711(f)(1)(B)(i), (f)(4); NYSE Rule 472(f)(5). NASD Rule 2711(f)(2); NYSE Rule 472(f)(3). NASD Rule 2711(f)(5); NYSE Rule 472(f)(6). Id. Examples given for impracticability are if the research analyst covering the issuer has left the employ of the member firm or the member firm has terminated coverage of the industry or sector of the issuer. Id. If it is impracticable to provide a final recommendation or rating, the member firm must provide the rationale for the decision to terminate coverage. Id. NASD Rule 2711(g); NYSE Rule 472(e). NASD Rule 2711(g)(1-3); NYSE Rule 472(e)(1-3). There are exceptions to this blackout period for research analysts that recently began covering a company or for purchases and sales that are due to a significant news or a significant event, as well as other exceptions. See NASD Rules 2711(g)(2)(A), (B); NYSE Rule 472(e)(4). There are further exemptions to the trading restriction rules for transactions such as sales of shares of registered diversified investment companies and sales pre-approved by the legal or compliance department based on unanticipated significant changes in personal financial circumstances. See NASD Rules 2711(g)(4) and (5); NYSE Rule 472(e)(4). NASD Rule 2711(g)(6); NYSE Rule 472(e)(5). NASD Rule 2711(h); NYSE Rule 472(k). NASD Rule 2711(h)(2)(A)(ii); NYSE Rule 472(k)(1)(i)(a). The Conflict of Interest Rules provide for an exception to the disclosure required by the second and third bullets "to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking services transactions of the subject company." NASD Rule 2711(h)(2)(C); NYSE Rule 472(k)(3). NASD Rules 2711(h)(1)(B), (h)(2)(A)(iii); NYSE Rules 472(k)(1)(i)(c), (d). If the research report is published less than 30 calendar days after the end of the most recent month, such information need only be provided as of the end of the second preceding month prior to the publication of the research report. NYSE Rules 472(k)(1)(ii)(b), (k)(1)(iii)(a); see NASD Rules 2711(h)(2)(A)(iii-v). The Conflict of Interest Rules provide for an exception "to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking transactions of the subject company." NASD Rule 2711(h)(2)(C); NYSE Rule 472(k)(3). The rules provide that this disclosure requirement will be deemed satisfied if any such compensation is disclosed in research reports within 30 days after the completion of the most recent calendar quarter, provided that the member has taken steps reasonably designed to identify such compensation during that calendar quarter. NASD Rule 2711(h)(2)(A)(v)(a); NYSE Rule 472(k)(1)(iii)(a)(1). The rules further provide that an analyst and member would be presumed not to have reason to know of affiliate non-investment banking compensation from the subject company if the member maintains and enforces policies and procedures reasonably designed to prevent all research analysts and influential employees (those with the ability to influence the substance of research reports) for directly or indirectly receiving information from the affiliate concerning such compensation. NASD Rule 2711(h)(2)(A)(v)(b); NYSE Rule 472(k)(1)(iii)(a)(2). NASD Rules 2711(h)(1)(A), (C), (h)(2)(A)(i) and (h)(3); NYSE Rules 472(k)(1)(ii)(a), 472(k)(1)(iii)(b-d). NASD Rule 2711(h)(4-7); NYSE Rule 472(k)(1)(i)(e-h). See note 578 for the definition of "public appearance" for purposes of the Conflict of Interest Rules. The Conflict of Interest Rules provide for an exception to this requirement and the requirement in the preceding bullet "to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking services transactions of the subject company." NASD Rule 2711(h)(2)(C). NYSE Rule 472(k)(3). Global Settlement, Litigation Release Nos. 18109-18118 (April 28 2003). Addendum, Section I.1. Addendum, Section I.2. Addendum, Section I.3. Addendum, Section I.4. Addendum, Section I.5. Addendum, Section I.7. Addendum, Section I.8. Compare to the similar requirements in the NASD and NYSE rule amendments. NASD Rule 2711(f)(5); NYSE Rule 472(f)(5). Addendum, Section I.9, I.11. Compare to NASD Rule 2711(c)(4) and NYSE Rule 472(b)(4), each of which as proposed applies only to pitches for IPO business. Addendum, Section I.10. Addendum, Section II.3. Addendum, Section I.1.e. Addendum, Section II.1.c. Addendum, Section II.2. Addendum, Section II.5. Addendum, Section II.3. Defining the Term "Qualified Purchaser" Under the Securities Act of 1933, Securities Act Release No 8041 [2001-2002 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 86,610, at 85,098, 85,103-85,104 (December 19 2001). New York Stock Exchange Listed Companies Manual, ¶ 103.00.A Id. ¶ 102.01A. Id. ¶ 102.01.B. For IPOs, the NYSE will rely on a written commitment from the underwriter regarding the anticipated value of the offering. Id. Id. ¶ 102.01.C.I. Id. ¶ 102.01.C.II. Id. ¶ 102.01.C.III. Id. ¶ 103.01.A. Id. Id. For IPOs, the NYSE will rely on a written commitment from the underwriter regarding the anticipated value of the offering. Id. Id. ¶ 103.01.B.I. Id. ¶ 103.01.B.II. Id. ¶ 103.01.B.III. National Association of Securities Dealers, Inc., NASD Manual, Rule 4320(e)(2)(A). Id. Rule 4320(e)(4). Id. Rule 4200(a)(30). Id. Rule 4320(e)(5). Id. Rule 4320(e)(6). Id. Rule 4420(a). Id. Rule 4420(b). Id. Rule 4420(c). Id. Rule 4420(f).
October 07 2003
