Securities Regulation

1. Securities Regulation Disclosure and Accuracy Mandatory disclosure Forms Board duties Regulation FD “Up the ladder” reporting (last updated 19 Mar 13)

2. Disclosure and Accuracy Mandatory disclosure Forms Board duties Regulation FD “Up the ladder” reporting

3. Regulation Ex ante disclosure Ex post enforcement Info Price Market forces ECMH Intermediaries

4. What is a “public company”? • Section 12(a) • Listed on national exchange • Brokers can’t transact in stock unless registered • Section 12(g) • OTC companies: 500 record Shs + $10 MM assets • Deregistration: [< 300 Shs] OR [ < 500 Shs + < 10 MM for 3 yrs] • Section 15(d) • Company files RS under ’33 Act • Subject to periodic reporting (not proxy or TO rules) • Pink Sheets • Reverse Merger

5. What is a “public company”? • Section 12(a) • Listed on national exchange • Brokers can’t transact in stock unless registered • Section 12(g) • OTC companies: 500 record Shs + $10 MM assets • Deregistration: [< 300 Shs] OR [ < 500 Shs + < 10 MM for 3 years] • Section 15(d) • Company files RS under ’33 Act • Subject to periodic reporting (not proxy or TO rules)

6. Online information(real time) … • sec.gov • Search EDGAR • Description of SEC forms • Regulation S-K • Netflix • Annual report / Form 10K • Special report / Form 8K • Ownership report / Form 3, 4, 5, 13G

7. “Continuous disclosure”(real time basis) … Orange Inc. sells consumer batteries. Sales have lagged this year so it engages in some late-year “channel stuffing.” When its auditor finds out, the auditor threatens to quit – unless the company revises its financials. Instead, the company CEO resigns in disgrace! What must be disclosed? When? • The “channel stuffing” – once discovered • The auditor’s threats to quit • The CEO’s departure • The company’s restatement

11. 1-A / 2-B / 3-A / 4-B / 5-B / 6-A / 7-A / 8-B Public Company Disclosure – Pop Quiz • 5. Where would you find out whether Netflix subscriber numbers fell or rose last year? • Form 10-Q • Form 10-K • Form 14A • 6. If Reed Hastings went to a high-tech conference? • He could not say that Netflix would be doing a special deal with Apple, if nobody knew • He could describe this special deal, given that many stock analysts were at the conference • 7. If you noticed that Netflix’s latest 10-Q had a note identifying a big drop in new customers? • You should sell your NFLX stock • Don’t bother, the market already knows • Don’t sell NFLX: it’s insider trading • 8. A friend works at NFLX and tells you about secret negotiations with Apple … • Buy NFLX because it’s stock price is likely to rise • Don’t do anything, because the info is insider information • Turn your friend into the SEC 1. What is “public company”? • One whose securities are listed on NYSE • One with more than $100MM in assets 2. What is required of a public company? • Disclosure of material information as it becomes known to management • Disclosure as required in SEC forms, even when not material 3. Where would you find out whether Reed Hastings sold his Netflix stock? • Form 4 • Form 8-K • Form 10-Q • Form 10-K 4. Where would you find Reed Hastings’s current pay? • Form 8-K • Form 14A • Form 10-K

12. Hewlett-Packard (SEC 2007) Thomas Perkins (Chair, Nominating/Governance Committee)

13. Disclosure and Accuracy Mandatory disclosure Forms Board duties Regulation FD (voluntary disclosures) “Up the ladder” reporting

14. Hypothetical CEO of SSSystems Inc. is invited to tech conference by Goldman Sachs. In Q&A, CEO is asked about effects of 9/11 on industry. CEO answers that “contracts are now getting signed” and “our Q4 appears quite normal.” This is news! The securities analysts flip open their cell phones and type into their Blackberrys – “Buy SSS” Has CEO violated Reg FD – • What is purpose of Reg FD? • Were statements material? Non-public? • Does Reg FD apply at conference? • Could CEO talk to Auditor? Lawyer? Credit rating agency?

15. Regulation FD Disclosure of material, non-public information • “covered persons”: B-D, IA, IC, person expected to trade • Intentional disclosures • Must disclose “simultaneously” • Later file Form 8-K • Unintentional disclosures • Must disclose “promptly” (within 24 hours) • File 8-K • Applies to senior executives and those who communicate to public • Exceptions: • normal course of business (after Dodd-Frank not credit rating agency, unless confidentiality) • government officials • ’33 Act “road show” • Disclosure by foreign private issuers (still subject to antifraud rules) Is Reg FD constitutional?

16. Siebel Systems • CEO calls favored stock analyst • Tipper of “inside information”? • Mechanism for market efficiency? • CEO talks at industry conference • Disclosure of non-public information • Regulation FD • CFO and IR director have dinner with inst investor • Disclosure of good news • Company duties? Thomas Siebel (CEO)

17. Regulation FD Coverage – Rule 100 • Issuer disclosures (senior execs and IR) • Material nonpublic information • Specified market professionals [securities firms, inv advisers, mutual funds, hedge funds, pension funds, stock traders] • Exceptions for internal, confidential communications, to credit agencies Effect • Intentional – simultaneous public disclosure • Unintentional – promptly, within 24 hours • Liability – SEC enforcement (Rule 102)

18. Regulation FD Coverage: • Issuer disclosures (senior execs and IR) • Material nonpublic information • Specified market professionals [securities firms, inv advisers, mutual funds, hedge funds, pension funds, stock traders] • Exceptions for internal, confidential communications, to credit agencies Effect – Rule 100 • Intentional – simultaneous public disclosure • Unintentional – promptly, within 24 hours • Liability – SEC enforcement (Rule 102)

19. Siebel Systems • Call to favored stock analyst • Tipper of “inside information”? • Mechanism for market efficiency? • CEO talks at industry conference • Disclosure of non-public information • Regulation FD • CFO and IR director have dinner with inst investor • Disclosure of good news • Company duties? • What should the company have done? • Not held conference? • Not meet with analysts? • Add disclosure controls? • Webcast? [click here]

20. Siebel Systems • Call to favored stock analyst • Tipper of “inside information”? • Mechanism for market efficiency? • Industry conference • Disclosure of non-public information • Regulation FD • CFO and IR director have been having dinner with inst investor • Your duties? • Company duties? Thomas Siebel (CEO)

21. Disclosure and Accuracy Mandatory disclosure Forms Board duties Regulation FD “Up the ladder” reporting

22. “Up- the-ladder” Rule 205 Securities attorney (including subordinate attorney) • Represents issuer • Becomes aware of evidence of a “material violation” (securities fraud or fiduciary breach) Must report evidence forthwith • to issuer's chief legal officer (and perhaps also CEO) • If not resolved • Audit committee • Board committee of outside Ds • Whole board

23. “Up- the-ladder” 3(b)(1) If an attorney, appearing and practicing before the Commission in the representation of an issuer, becomes aware of evidence of a material violation by the issuer or by any officer, director, employee, or agent of the issuer, the attorney shall report such evidence to the issuer's chief legal officer (or the equivalent thereof) or to both the issuer's chief legal officer and its chief executive officer (or the equivalents thereof) forthwith. Rule 205

24. “Up- the-ladder” 3(b)(2) If the chief legal officer (or the equivalent thereof) determines no material violation has occurred, is ongoing, or is about to occur, he or she shall notify the reporting attorney and advise the reporting attorney of the basis for such determination. OR he or she shall take all reasonable steps to cause the issuer to adopt an appropriate response, and shall advise the reporting attorney thereof. Rule 205

25. “Up- the-ladder” 3(b)(3) Unless an attorney … reasonably believes that the chief legal officer or the chief executive officer of the issuer (or the equivalent thereof) has provided an appropriate response within a reasonable time, the attorney shall report the evidence of a material violation to: • The audit committee of the issuer's board of directors; • Another committee of the issuer's board of directors consisting solely of [outside directors] or • The issuer's board of directors Rule 205

26. “Up- the-ladder” 3(b), (d) A subordinate attorney shall comply with this part notwithstanding that the subordinate attorney acted at the direction of or under the supervision of another person. A subordinate attorney may take the steps permitted or required by Rule 3(b) or (c) if the subordinate attorney reasonably believes that a supervisory attorney to whom he or she has reported evidence of a material violation under Rule 3(b) has failed to comply with Rule 3. Rule 205

27. The end

28. WR Grace

29. Board duties You are the chair of the compensation committee of Grace. What are your responsibilities? • Send out questionnaires? • Rely on lawyers? • Review contracts? • Make sure contract filed? SEC Commissioner Steven Wallman

30. Board duties You are the chair of the compensation committee of Grace. What are your responsibilities? • Send out questionnaires? • Rely on lawyers? • Review contracts? • Make sure contract filed? Wallman: “Officers and directors [need not ensure] the accuracy and completeness of company disclosures. … Enough that Company consented to cease and desist order.”