The SEC has adopted rules prohibiting “bad actors” from using Rule 506 after September 23, 2013 (the effective date of the rules), or if prohibited conduct occurred prior to the effective date of the rules, the prohibition will not apply if disclosure of the past prohibited conduct is made to investors a reasonable amount of time prior to the sale of securities. Since public companies often rely on Rule 506 for financing transactions, it seems logical that many would want to update their D&O questionnaires for the bad actor provisions to ensure that the 506 exemption is available going forward and to cure through disclosure past prohibited conduct by the applicable covered persons.
Public companies are currently required to make disclosure about directors’ and officers’ prior criminal convictions, securities law violations and other matters in proxy statements pursuant to Item 401(f) of Form S-K. While similar to many of the “bad actor” events, Item 401(f) was separately drafted at a different time. The result is two parallel sets of background questions drafted in separate styles that are similar enough to be repetitive but dissimilar enough to be difficult to combine in a way that makes sense.
One way to update D&O questionnaires is to just paste the bad actor questions after the 401(f) questions. It is a valid choice and may be the easiest way to go, and easier to monitor for annual updates. However it results in one set of questions regarding a seemingly loosely related and arbitrary series of events for 401(f) being followed by another set of questions regarding another seemingly loosely related and arbitrary series of events for Rule 506, the cumulative effective of which is to make it look like all of the events are posted in random order.
The other way to do it is to try and group similar Item 401(f) events with similar Rule 506 events, or better yet combine and consolidate related questions. While easily said, it is difficult to execute. Since both rules aggregate multiple, highly specific events within a single question, this approach results, as we have tried to implement it, in probably more questions being asked, albeit in maybe a more understandable format.
You can find a sample of both forms of updates that we have prepared here. We have posted the Word version (or at least tried). Whatever approach you choose, we suggest the questionnaire be given not only to current officers and directors, but potential officers and directors, and present and potential security holders and others that could potentially trip the “bad actor” rules.
If you have any ideas, suggestions for improvements, or corrections, please forward them to firstname.lastname@example.org.
We have also updated our Preliminary 2014 Proxy Checklist which you can find here.
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