At an open meeting on May 23, 2007, the Securities and Exchange Commission (SEC) took regulatory action in three different areas:

Section 404 of Sarbanes-Oxley: SEC adopted interpretive guidance and related rules for management’s evaluation and assessment of internal control over financial reporting.

Smaller-Company Capital Raising and Disclosure and Private Offerings: SEC proposed modernizing these regulatory requirements, including:

– increasing the number of companies eligible for the short-form disclosure and reporting requirements;

– revising the eligibility requirements for registration of securities on Form S-3 and Form F-3;

– exempting compensatory employee stock options by non-reporting companies from the registration requirements of the Securities Exchange Act of 1934 (Exchange Act);

– exempting, pursuant to Regulation D under the Securities Act of 1933 (Securities Act), offers and sales of securities to a new category of accredited investors;

– revising Form D to include mandated electronic filing; and

– amending Rule 144 of the Securities Act to shorten existing holding periods.

• Credit Rating Agency Reform Act of 2006: SEC adopted rules to implement the act.

The text of the interpretive guidance, proposed rules and adopted rules are not available yet, and, accordingly, the descriptions provided in this special alert are based on SEC press releases and statements made by the commissioners and SEC staff at the open meeting. We will distribute a more comprehensive summary once the text of the interpretive guidance, proposals and adopted rules become available.

Management’s Evaluation of Internal Control over Financial Reporting

In December 2006, the SEC proposed principles-based interpretive guidance for management regarding the evaluation of internal control over financing reporting required by Section 404 of the Sarbanes-Oxley Act of 2002. On May 23, 2007, the SEC took the following actions regarding this proposal:

• adopted final interpretive guidance substantially in the form as proposed in December 2006 with some clarifications;

• adopted final rules related to the interpretive guidance; and

• proposed a new rule for comment defining the term “significant deficiency.”

The final rules adopted make it clear that a company that performs its evaluation in accordance with the interpretive guidance would satisfy the annual evaluation required by Section 404. The SEC was careful to note that compliance with the interpretive guidance is not required if management’s evaluation is effective under the rules related to Section 404. Regulation S-X was also clarified to make it clear that the auditor’s report on financial statements only needs to include the auditor’s own assessment regarding the effectiveness of internal control over financial reporting and does not need to include an opinion as to management’s evaluation.

In addition, the SEC decided not to extend the 404 compliance deadline for non-accelerated filers.

It should also be noted that the Public Company Accounting Oversight Board met on May 24, 2007, to consider adopting revised audit rules relating to Section 404.

Regulatory Relief and Simplification for Smaller Reporting Companies

The SEC approved proposals to revise the disclosure requirements applicable to smaller issuers. The revisions will include a new defined term, “smaller reporting companies.” Smaller reporting companies will include issuers with a common equity public float of less than $75 million. Because the current requirement for eligibility for use of the “S-B” forms is common equity public float of less than $25 million, this term would significantly expand the pool of issuers entitled to provide disclosure required by smaller issuers. Furthermore, the “S-B” series of forms would be rescinded, and many of the requirements set forth therein would be included in the forms currently utilized by other issuers. Issuers would be able to choose, on an item-by-item basis, whether to provide disclosure at a level comparable to that required by the “S-B” series of forms or at the higher level required of other issuers.

Revisions to Eligibility Requirements for Securities Offerings on Forms S-3 and F-3

The SEC approved proposals to revise the eligibility requirements of Forms S-3 and F-3 to permit a reporting company with a common equity public float of less than $75 million to register securities using these forms, so long as:

• the reporting company meets all other eligibility requirements for Forms S-3 or F-3;

• the reporting company is not a shell company and has not been a shell company for at least one year prior to the filing of the registration statement on Form S-3 or Form F-3; and

• the reporting company does not sell more than the equivalent of 20 percent of its public float within primary offerings registered on Form S-3 or Form F-3 in any one year period (note that the SEC did not specifically discuss the calculation dates, but presumably the 20 percent will be calculated as of the date of the first offering on Form S-3 or Form F-3 and on every anniversary thereafter).

Exemption of Compensatory Employee Stock Options from Registration under Exchange Act Section 12(g)

Currently, stock options constitute a separate class of an issuer’s securities and, subject to the requirements of Section 12(g), are required to be registered under the Exchange Act and therefore subjecting a non-reporting company to the reporting requirements of the Exchange Act. The SEC approved a proposal for two new exemptions from the registration requirements of Section 12(g) of the Exchange Act, which would only apply to compensatory employee stock options, not the class of securities underlying the options:

• options issued by a non-reporting company, so long as

– the options are issued pursuant to a written plan;

– eligible recipients are limited to employees, directors, consultants and advisors;

– the transferability of the shares received upon exercise of the options and shares of the same class as those underlying the options is restricted; and

– the risk and financial information is provided to option holders and holders of shares received upon exercise of the options that is of the type required if securities sold in reliance on Rule 701 exceeded $5 million in a 12-month period.

• compensatory employee stock options issued by issuers that are subject to Exchange Act reporting.

Revisions to Regulation D Exemptions

The SEC approved proposals to adopt a series of revisions to Regulation D in order to expand the pool of capital available under Regulation D.

The revisions would include a new exemption from registration (Rule 507) pursuant to which issuers would be permitted to offer unregistered securities and to utilize limited advertising similar to that permitted on “tombstone ads,” so long as the offering is made only to a newly defined group of investors, “Rule 507 Qualified Purchasers.” Rule 507 Qualified Purchasers will be defined to include those purchasers with either $2.5 million in investments or individual annual income of $400,000 (or $600,000 in the aggregate with a spouse). Institutions holding $10 million in investments generally would qualify as Rule 507 Qualified Purchasers, and institutions qualifying as accredited investors would qualify without the monetary threshold, directors, executive officers and general partners of the issuer would qualify as Rule 507 Qualified Purchasers without the monetary threshold. In addition, it should be noted that the portion of the proposed new rule with respect to permitted advertisements would be issued pursuant to Section 28 of the Securities Act, not Section 4(2), so that the prohibition on general solicitations remains applicable.

The definition of “accredited investor” would also be revised as follows:

• individual investors that own investments of $750,000 and institutional investors that own investments of $5 million would qualify as “accredited investors”;

• the list of entities that qualify as “accredited investors” would be expanded, although the discussion at the open meeting did not specify what these entities would be;

• beginning September 1, 2012, the monetary thresholds for qualifying as an “accredited investor” would be periodically adjusted to reflect inflation.

In addition, the SEC proposed the following revisions to Regulation D:

• the disqualification for bad actors set forth in Rule 505(b)(2)(iii) (which incorporates the provisions of Rule 262) would apply to all offerings pursuant to Regulation D, not just those offerings pursuant to Rule 505;

• the integration safe harbor period would be reduced from six months to 90 days and the SEC also proposed providing further guidance on concurrent public and private offerings; and

• issuers will be able to file their Forms D electronically, and Form D will be substantially simplified from its current form.

Revisions to Rules 144 and 145 to Shorten the Holding Period for Affiliates and Non-Affiliates

The SEC approved proposals relating to the following revisions to Rule 144:

• shortening the holding period from one year to six months where the issuer has been subject to Exchange Act reporting requirements for at least 90 days prior to the sale of securities;

• re-introducing a tolling provision that suspends the holding period when the holder of securities enters into certain hedging arrangements, such as puts or short sales (provided, that this tolling period would not cause the holding period to exceed one year); and • simplifying compliance with Rule 144 for purposes of resales by:

– permitting a person who has not been an affiliate of the issuer for at least three months to resell freely after the applicable holding period;

– eliminating the manner of sale restrictions applicable to debt securities; and

– codifying certain staff interpretations with respect to Rule 144.

In addition, the SEC voted to revise Rule 145 to harmonize the holding periods under Rule 145(d) with those under the revised Rule 144.

Finally, the SEC is soliciting comments on whether to permit affiliates of issuers that are subject to the filing requirements of Section 16 of the Exchange Act to satisfy their Form 144 filing requirements instead by timely filing a Form 4.

Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Ratings Organizations

In February 2007, the SEC proposed for comment rules to implement provisions of the Credit Rating Agency Reform Act of 2006 (Credit Agency Reform Act), enacted on September 29, 2006, which provides authority for the SEC to implement registration, recordkeeping, financial reporting and oversight rules with respect to registered credit rating agencies. On May 23, 2007, the SEC adopted the following six rules and a registration form to implement provisions of the Credit Agency Reform Act:

• Rule 17g-1 will require credit rating agencies to register as nationally recognized statistical rating organizations (NRSROs) on a Form NRSRO;

• Rule 17g-2 will require credit rating agencies registered as NRSROs to make and retain certain books and records, which must be complete and current;

• Rule 17g-3 will require credit rating agencies registered as NRSROs to annually furnish the SEC on a confidential basis with audited financial statements and certain unaudited financial reports;

• Rule 17g-4 will require credit rating agencies registered as NRSROs to enact policies and procedures to prevent inappropriate use of material non-public information;

• Rule 17g-5 will require credit rating agencies registered as NRSROs to disclose and manage conflicts of interest, such as a credit rating agency’s receipt of fees for credit ratings in respect of securities it issues or underwrites; and

• Rule 17g-6 will prohibit unfair, coercive or abusive rating practices by credit rating agencies registered as NRSROs. In light of comments, the SEC recommended that one prohibition in the proposed rule, banning the practice of issuing an unsolicited rating and then soliciting the rated person to pay for the credit rating or another product or service, be removed from the final rule. The SEC intends to review information collected in rating agencies’ registration statements and revisit this provision.

The SEC also solicited comment on whether NRSROs should be required to disclose standardized rating performance metrics, such as metrics comparing security market value against security ratings. In light of comments, the SEC elected not to include such a requirement. The SEC intends to review information collected in rating agencies’ registration statements and revisit this issue.