Staff Legal Bulletin No. 2 (CF)
ACTION: Publication of CF Staff Legal Bulletin
DATE: April 15, 1997
SUMMARY: This staff legal bulletin provides the Division of
Corporation Finance's views on requests to modify the Securities
Exchange Act of 1934 periodic reporting of issuers that are
either reorganizing or liquidating under the provisions of the
United States Bankruptcy Code.
SUPPLEMENTARY INFORMATION: The statements in this legal bulletin
represent the views of the Division's staff. This bulletin is
not a rule, regulation, or statement of the Securities and
Exchange Commission. Further, the Commission has neither
approved nor disapproved its content.
CONTACT PERSON: For further information please contact Anne M.
Krauskopf, Special Counsel, at (202) 942-2900.
I. Background
Issuers are required to file current and periodic reports
with the Commission pursuant to Sections 13(a)1 or 15(d)2 of
the Exchange Act3 if they have:
In June 1972, the Commission published Exchange Act Release
No. 9660, which addressed how the Exchange Act reporting
requirements apply to "[i]ssuers which have ceased or severely
curtailed their operations." In the release, the Commission
emphasized the importance of Exchange Act reporting in preserving
free, fair, and informed securities markets. The Commission
stated, however, that "when not inconsistent with the protection
of investors, [it] would modify the reporting requirements as
they apply to particular issuers."
Companies in bankruptcy are not relieved of their reporting
obligations. Neither the United States Bankruptcy Code7 nor
the federal securities laws provide an exemption from Exchange
Act periodic reporting for issuers that have filed for
bankruptcy. In the release, however, the Commission expressed
the general position that, with respect to issuers subject to the
jurisdiction of the Bankruptcy Court, it generally would accept
reports which "differ in form or content from reports required to
be filed under the Exchange Act."
The release also states that, in deciding whether to accept
modified Exchange Act reports, the Commission will consider the
following: (1) how difficult it is for the issuer to obtain the
information necessary to complete those reports;8 (2) the
issuer's financial condition; (3) the issuer's efforts to advise
its security holders and the public of its financial condition
and activities; and (4) the nature and extent of the trading in
the issuer's securities.
The release provides the Commission's general position on
accepting modified Exchange Act reports from issuers subject to
the jurisdiction of the Bankruptcy Court. An issuer relying on
that general interpretive guidance should take all steps possible
to inform its security holders and the market of its
on-going financial condition and the status of its bankruptcy
proceedings, including filing any available information with the
Commission.
II. Requests for Modified Exchange Act Reporting
An issuer in bankruptcy may request a "no-action" position
from the Division that applies the positions in the release to
the issuer's facts.9 In providing a no-action position, the
Division determines whether modified reporting is consistent with
the protection of investors. In its request, the issuer should
present a clear demonstration of its inability to continue
reporting, its efforts to inform its security holders and the
market, and the absence of a market in its securities.
Requests often do not provide all of the information
necessary for the Division's analysis. This staff legal bulletin
identifies factors the Division considers when acting on these
requests. This guidance will help issuers prepare requests and
make the process more efficient and less costly.
III. Information Required in Requests
A. Information Regarding Disclosure of Financial Condition
The first factor the Division considers is whether the
issuer made efforts to inform its security holders and the market
of its financial condition. The Division also looks at the
issuer's Exchange Act reporting history. The request should
include the following information.
1. Whether the issuer complied with its Exchange Act reporting obligations before its Bankruptcy Code filing
Because the issuer's efforts to inform the market of its
financial condition are important, an issuer submitting a request
should have been current in its Exchange Act reports for the 12
months before its Bankruptcy Code filing.10 Accordingly, the
issuer should discuss its Exchange Act reporting history for that
period.
2. When the issuer filed its Form 8-K announcing its bankruptcy filing; whether the issuer made any other efforts to advise the market of its financial condition
The Division considers the timeliness of the issuer's Form 8-
K announcing its bankruptcy filing when determining whether to
grant the request.11 The Division does not have a specific,
objective test concerning the timing of the Form 8-K filing.
However, the issuer should state the date the Form 8-K was due
and filed. If the issuer filed the Form 8-K after the due date,
it should explain why. The issuer also should discuss any other
efforts that it made to inform its security holders and the
market of its financial condition.
3. Whether the issuer is able to continue Exchange Act reporting; whether the information in modified reports is adequate to protect investors
The issuer should discuss the reasons why it is unable to
continue Exchange Act reporting. The request should discuss
specifically: (1) whether the issuer has ceased its operations
or the extent to which the issuer has curtailed operations; (2)
why filing periodic reports would present an undue hardship to
the issuer; (3) why the issuer cannot comply with the disclosure
requirements; and (4) why the issuer believes granting the
request is consistent with the protection of investors.
Management of the issuer also should represent, if true,
that: (1) the filing of periodic reports would present an undue
hardship; and (2) the information contained in the reports filed
with the Bankruptcy Court pursuant to the Bankruptcy Code is
sufficient for the protection of investors while the issuer is
subject to the jurisdiction of the Bankruptcy Court.
B. Information Regarding the Market for the Issuer's Securities
The Division also considers the nature and extent of trading
in the issuer's securities. The issuer should discuss in detail
the market for its securities. Trading of the issuer's
securities on a national securities exchange or the Nasdaq Stock
Market is, by itself, sufficient evidence that there is an active
market for those securities. The Division will not issue a
favorable response to a request for modification of Exchange Act
reporting for those securities.12
Issuers that do not have securities traded on a national
securities exchange or the Nasdaq Stock Market should quantify
the effect of the Bankruptcy Code filing on the trading in the
issuer's securities.13 This information should demonstrate that
there is minimal trading in the securities.14
The issuer should state the number of market makers for its
securities. The issuer also should provide detailed information
regarding the number of shares traded and the number of trades
per month for each of the three months before the issuer's
Bankruptcy Code filing and each month after that filing.15
General statements in the request that trading has been
"minimal" or "insignificant" are not sufficient to enable the
Division to reach a conclusion on the request. An unequivocal
statement that there is "no trading" in the issuer's securities
is sufficient.16
C. The Timing of the Issuer's Request for Modified Reporting
An issuer should submit its request promptly after it has
entered bankruptcy, not when it is preparing to emerge from
bankruptcy.17 The Division will consider a request as submitted
"promptly" if it is filed before the date the issuer's first
periodic report is due following the issuer's filing for
bankruptcy.18
IV. Positions Taken by the Division in Granting Requests
A. Reports Required While Bankruptcy Proceedings are Pending
Generally, the Division will accept, instead of Form 10-K
and 10-Q filings, the monthly reports an issuer must file with
the Bankruptcy Court under Rule 2015.19 The issuer must file
each monthly report with the Commission on a Form 8-K within 15
calendar days after the monthly report is due to the Bankruptcy
Court.
Notably, the relief given applies only to filing Forms 10-K
and 10-Q.20 The issuer still must satisfy all other provisions
of the Exchange Act, including filing the current reports
required by Form 8-K and satisfying the proxy, issuer tender
offer and going-private provisions.21
Issuers reorganizing under the jurisdiction of the
Bankruptcy Court must file a Form 8-K to disclose any material
events relating to the reorganization. Issuers liquidating under
the jurisdiction of the Bankruptcy Court must file a Form 8-K to
disclose whether any liquidation payments will be made to
security holders, the amount of any liquidation payments, the
amount of any expenses incurred, and any other material events
relating to the liquidation.22
B. Reports Required Upon Emergence From Bankruptcy
1. An issuer that is reorganized under its bankruptcy plan
When an issuer's reorganization plan becomes effective, the
issuer must file an appropriate Form 8-K. That Form 8-K should
include the issuer's audited balance sheet. From then on, the
issuer must file Exchange Act periodic reports for all periods
that begin after the plan becomes effective.23
Any post-reorganization filings under the Securities Act or
the Exchange Act must include audited financial statements
prepared in accordance with generally accepted accounting
principles for all periods for which audited financial statements
are required even though the issuer may have been subject to
bankruptcy proceedings during some portion of those periods.24
2. An issuer that is liquidated under its bankruptcy plan
After the issuer's liquidation plan becomes effective, the
issuer must continue to disclose material events relating to the
liquidation on Form 8-K. At the time the liquidation is
complete, the issuer must file a final Form 8-K to report that
event.25
C. Effect on Short-Form Registration, Rule 144 and Regulation S
An issuer that has filed modified reports would not be
considered "current" in its Exchange Act reporting, with respect
to those reports due while its bankruptcy proceedings were
pending, for purposes of: (1) determining eligibility to use
Securities Act Form S-2 or S-3; (2) satisfying the current public
information requirement of Securities Act Rule 144(c)(1); or (3)
satisfying the reporting issuer definition of Rule 902(l) of
Regulation S.
D. Availability of Rule 12h-3
Exchange Act Rule 12h-3 provides a means to suspend an
issuer's obligation to file periodic reports under Section 15(d)
of the Exchange Act. The Division has taken the position that
modified Exchange Act reporting in accordance with a grant of a
request would be sufficient for purposes of meeting the reporting
requirement of Rule 12h-3.26 Accordingly, an issuer that
otherwise satisfies the conditions of Rule 12h-3 may suspend
reporting upon emergence from its bankruptcy proceedings if it
has been granted relief in response to a request and has
satisfied the conditions of that grant.
Footnotes
1
15 U.S.C. 78m(a).
2
15 U.S.C. 78o(d).
3
15 U.S.C. 78a et seq.
4
See Section 12(b) of the Exchange Act (15 U.S.C. 78l(b)).
5
15 U.S.C. 78l(g).
6
15 U.S.C. 77a et seq.
7
11 U.S.C. 101 et seq.
8
See Exchange Act Rule 12b-21.
9
The Division has granted nine no-action requests since
January 1995. E.g., Comptronix Corporation (April 4, 1997);
Cray Computer Corporation
(May 16, 1996); I.C.H. Corporation (May 10, 1996); F&M
Distributors, Inc. (May 1, 1996).
10
Focus Surgery, Inc. (October 3, 1996).
11
Item 3 of Form 8-K requires the issuer to file a current
report on that form within 15 calendar days of specified
events related to a bankruptcy filing.
12
If the issuer remains current in its Exchange Act reporting
requirements until trading on a national securities exchange
or the Nasdaq Stock Market stops, it may then request
modified reporting. F&C International, Inc.
(October 15, 1993).
13
An issuer's securities are not considered to be "traded" on
a national securities exchange or the Nasdaq Stock Market
if: (1) those securities have been delisted; or (2) trading
in those securities on those markets has formally been
suspended.
14
E.g., Sea Galley Stores, Inc. (March 24, 1995) (tabular
presentation demonstrated decreased trading volume in the
issuer's securities).
15
If national securities exchange or Nasdaq Stock Market
trading stopped during one of these months, the issuer
should show separately within that month the information for
the periods before and after trading stopped.
16
E.g., Numerica Financial Corporation (April 1, 1996) (noting
that no transfers of issuer stock occurred for a two-year
period and that transfer agent was given instructions to
prohibit further transfers); F&M Distributors, Inc., supra,
and Focus Surgery, Inc., supra (stating there was no trading
in the issuer's stock).
17
Selectors, Inc. (September 18, 1990) and AorTech, Inc.
(September 14, 1990).
18
Focus Surgery, Inc., supra. The staff also will consider a
request to be submitted "promptly" if the issuer is current
in its Exchange Act reporting after filing its Bankruptcy
Code petition and through the date of its request. United
Merchants and Manufacturers, Inc. (November 19, 1996).
19
Fed. R. Bankr. P. 2015.
20
If, as a result of a "hardship," an issuer wants to file in
paper format rather than electronically on EDGAR, it should
contact the Division's Office of Edgar Policy at (202) 942-
2940.
21
Transactions in the issuer's securities also continue to be
subject to the requirements of the Exchange Act, including
the tender offer and short-swing profit provisions.
22
BSD Bancorp, Inc. (March 30, 1994); Cray Computer Company,
supra; I.C.H. Corporation, supra.
23
Famous Restaurants, Inc. (June 4, 1993); Sea Galley Stores,
Inc., supra; Diversified Industries, Inc., supra.
24
Any requests for relief from financial statement obligations
should be sent to the Division's Office of Chief Accountant.
25
E.g., Cray Computer Company, supra; I.C.H. Corporation,
supra.
26
Union Valley Corporation (November 2, 1993).