Division of Corporation Finance
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) or 15(d) of the Exchange Act if they have:
  • securities listed on a national securities exchange;
  • securities registered under Section 12(g) of the Exchange Act; or
  • a registration statement that has become effective under the Securities Act of 1933.
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 Code 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; (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. 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. 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. 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.
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. This information should demonstrate that there is minimal trading in the securities.
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.
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.

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. 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.

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. 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. 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.
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.

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.
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.

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.

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. 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.
/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).
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