Disclosure Requirements

At today’s Practising Law Institute SEC Speaks annual program, Acting Chair Piwowar made opening remarks.  During his wide-ranging discussion, Acting Chair Piwowar, inspired by William Graham Sumner’s the “forgotten man” referred throughout to the Securities and Exchange Commission’s investor protection mission and the objective of keeping in mind the interests of the “forgotten investor.”  Piwowar commented on the Commission’s focus on effective disclosure requirements and the need to be guided by the concept of materiality in formulating disclosure requirements.  He pointed to various specialized disclosure requirements introduced by the Dodd-Frank Act, including the resource extraction, conflict minerals and related matters.  Piwowar noted the importance of avoiding disclosure overload.  Piwowar also commented on Regulation D and questioned the utility of applying the “accredited investor” standard as a means of identifying individual investors that do not require the protection of the disclosures associated with registered offerings.

Providing a glimpse into upcoming actions, Piwowar noted that the Commission will consider whether to propose a request to comment on the requirements of Industry Guide 3 for offerings by financial services companies, consideration of a final rule requiring registrants that file registration statements and periodic and current reports that are subject to the exhibit requirements under Item 601 of Regulation S-K, or that file on Forms F-10 or 20-F, to include a hyperlink to each exhibit listed in the exhibit index of these filings and in order to enable the inclusion of such hyperlinks, to require that registrants submit all such filings in HTML format (see the proposed rule:  https://www.sec.gov/rules/proposed/2016/33-10201.pdf), a proposed rule relating to the use of inline XBRL data in filings, and amendments to Rule 15c2-12 relating to muni disclosures.

The use of non-GAAP financial measures by public companies continues to be an area of growing concern for the Securities and Exchange Commission (“SEC”). Since the staff of the SEC’s Division of Corporation Finance (the “Staff”) released its updated Compliance and Disclosure Interpretations on May 17, 2016, on the use of non-GAAP financial measures (the “Updated C&DIs”), the Staff has issued more than 200 comment letters related to non-GAAP financial measures that have become publicly available.

In this alert, we look at common themes or areas of concern identified by the Staff in these comment letters, as well as responses given by registrants. We also highlight pronouncements by senior members of the Staff on the important “critical gatekeeper” role audit committee members play in ensuring credible and reliable financial reporting, including compliance with the Updated C&DIs. Finally, we look at industry initiatives aimed at improving the dialogue among management, audit committee members, external auditors and other stakeholders with respect to the use and disclosure of non-GAAP financial measures.

Read our Practice Pointers: Anticipating and Addressing SEC Comments on Non-GAAP Financial Measures.

In a recent letter, the Chamber commented to the SEC’s Advisory Committee on Small and Emerging Companies about the Committee’s consideration of the factors affecting the trend of companies remaining private and deferring their IPOs.  The Chamber’s letter attributes some of the “hurdles” of becoming a public company to the SEC’s complex disclosure requirements, recent specialized disclosure requirements, and the influence of proxy advisory firms on governance in U.S. public companies.  The Chamber recently published a white paper, Essential Information:  Modernizing Our Corporate Disclosure System, which addresses materiality as a guiding principle for securities disclosures and cautions against “special interest disclosure” requirements.  Presumably, the SEC will continue to advance the disclosure effectiveness initiative, which had been undertaken under former Chair White’s leadership.

The Chamber’s letter is available here:  http://www.centerforcapitalmarkets.com/wp-content/uploads/2017/02/2017.2.15-US-Chamber-Letter-to-SEC-re-advisory-cmte-meeting-on-companies-staying-private.pdf?x48633

The Chamber’s white paper is available here:  http://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/U.S.-Chamber-Essential-Information_Materiality-Report-W_FINAL.pdf?x48633

Bloomberg BNA announced the recently updated SEC Reporting Issues for Foreign Private Issuers (Portfolio 5507) authored by Morrison & Foerster partners Anna T. Pinedo and James R. Tanenbaum.

This portfolio serves as a practical resource for both practitioners and foreign private issuers.  This new edition explains in detail various SEC proposed and finalized rules and regulations issued in 2016. It analyzes how those regulations would affect foreign private issuers–including the updated SEC staff guidance on how foreign private issuers should disclose the use of non-GAAP financial measures.

Thursday, March 9, 2017
12:30 p.m. – 2:00 p.m. EST

As the Trump Administration takes charge in 2017, the only thing that seems inevitable is that the regulatory and enforcement outlook will change. Initial indications point to a desire to relax or repeal certain regulations that may be regarded as burdensome to public companies. Also, proposed legislation would relax certain corporate governance and compensation-related measures that formed part of the Dodd-Frank Act. Proposed legislation also would address the types of cost-benefit analysis that would be required to support proposed regulation.

Don’t miss this chance to learn SEC regulations’ status and how they will likely change from experts who have been directly involved in rule-making and implementation of U.S. securities laws.

Topics to be discussed include:

  • Rules that were proposed but not adopted by the SEC as part of the Dodd-Frank Act rule-making mandate;
  • What to expect as far as corporate governance and executive compensation requirements;
  • Final rules adopted pursuant to the Dodd-Frank Act mandate relating to extractive minerals and specialized disclosures;
  • Future of the Disclosure Effectiveness initiative;
  • Likely status of the rules proposed by the SEC and not yet adopted;
  • Proposed changes affecting investment companies and their likely status; and
  • Anticipated enforcement areas of focus.

Speakers:

  • Andrew J. “Buddy” Donohue
    Former Chief of Staff, Director of Enforcement, and Director of Investment Management, SEC
  • Roberta Karmel
    Centennial Professor of Law, Brooklyn Law School,
    former SEC Commissioner
  • Robert Khuzami
    Partner, Kirkland & Ellis LLP, former Director of Enforcement, SEC
  • Troy Paredes
    Paredes Strategies LLC, former SEC Commissioner
  • Anna Pinedo
    Partner, Morrison & Foerster LLP

For more information, or to register, please click here.

Please contact cmg-events@mofo.com for a promotional code for discounted $99 tuition.

In this piece, which was included in a recent compendium published by Practising Law Institute (PLI) titled “Looking Ahead:  The Impact of the 2016 Election on Key Legal Issues,” we offer our thoughts on the likely areas of focus for the Securities and Exchange Commission.

Access here:  https://media2.mofo.com/documents/170100-securities-law-crystal-ball.pdf.

 

SEC disclosure requirements have prompted debate among key stakeholders regarding how to strike the right balance, weighing investor protection concerns and regulatory burdens. Partner Anna Pinedo is quoted in MergerMarket’s report on disclosure effectiveness. Read the report here: http://mergermarketgroup.com/wp-content/uploads/2016/12/Vintage-Group_Newsletter-3-2016_Final-LR.pdf.

As year-end approaches, many companies will be focused on preparing their annual reports.  Recent comments from various representatives of the Securities and Exchange Commission accounting staff emphasized the importance of maintaining strong and effective internal control over financial reporting (“ICFR”).  At the American Institute of Certified Public Accountants Conference in Washington, D.C., SEC Chief Accountant Wesley R. Bricker and SEC Deputy Chief Accountant Marc Panucci both addressed ICFR.  Mr. Panucci stated that ICFR remains a significant area of focus for the SEC, including through the coordinated efforts of the SEC’s Office of the Chief Accountant, the Division of Corporation Finance and the Division of Enforcement.  Mr. Panucci also noted that earlier this year, the SEC brought and settled a case against an issuer, members of its management, the audit partner and the issuer’s third-party consultant involving the inadequate evaluation of an identified control deficiency.  Additional takeaways from their remarks include the following:

  • Management, audit committees and auditors should engage in regular dialogue on ICFR assessments, as timely and effective communication among these parties is important for accurate assessments of ICFR and reliable financial reporting that benefits investors.
  • Management has the responsibility to carefully evaluate the severity of identified control deficiencies and to report, on a timely basis, all identified material weaknesses in ICFR. Any required disclosure should allow investors to understand the cause of the control deficiency and to assess the potential impact of the identified material weakness.
  • It is important to maintain competent and adequate accounting staff to accurately reflect the company’s transactions and to augment internal resources with qualified external resources, as necessary.
  • Management has to take responsibility for its assessment of ICFR, and that responsibility cannot be outsourced to third-party consultants. At the same time, third party-consultants can play an important and critical role when assisting management in its evaluation of ICFR.

Mr. Bricker’s speech is available at: https://www.sec.gov/news/speech/keynote-address-2016-aicpa-conference-working-together.html.  Mr. Panucci’s speech is available at: https://www.sec.gov/news/speech/panucci-2016-aicpa.html.

On December 5, 2016, SEC Chief Accountant Wesley R. Bricker, speaking at the American Institute of Certified Public Accountants Conference in Washington, D.C., emphasized the importance of high quality financial reporting to the U.S. capital markets.  In the area of non-GAAP reporting, Mr. Bricker noted that since the release of the new Compliance and Disclosure Interpretations on Non-GAAP Financial Measures (the “C&DIs”), the staff of both the SEC’s Division of Corporation Finance and the Office of the Chief Accountant (the “Staffs”) have engaged with registrants and their advisors on the topic and have noted substantial progress being made in addressing a number of problematic practices.  However, the Staffs have observed that more needs to be done, particularly in the area of evaluating the appropriateness of the use of non-GAAP financial measures and their prominence, as well as the effectiveness of disclosure controls and procedures.

Mr. Bricker focused particularly on the important “critical gatekeeper” role audit committee members play in ensuring credible, reliable financial reporting, as well as compliance with the C&DIs.  Highlights include the following:

  • Good reporting practices place a premium on audit committee member understanding of the company’s non-GAAP policies, procedures, and controls.
  • Audit committee members should seek to understand management’s judgments in the design, preparation and presentation of non-GAAP measures and how those measures might differ from approaches followed by other companies. These discussions will require an understanding of the company’s business model and how it is managed.
  • It is important to keep in mind that businesses operate in uncertain environments. If non-GAAP adjustments replace that business reality with smooth earnings over time, accelerate unearned revenues, or defer incurred expenses, those adjustments and disclosures should be evaluated closely under the C&DIs.
  • The oversight of management’s activities is crucial for investor protection, and it is important for both auditors and audit committees to keep and maintain the direct relationship they share. The following questions from audit committee members to their external auditor may be helpful in generating a dialogue:
    • If you as the auditor were in management’s shoes and solely responsible for preparation of the company’s financial statements, would they have in any way been prepared differently?
    • If you as the auditor were in an investor’s shoes, would you believe that you have received the information essential to understanding the company’s financial position and performance?
    • Is the company following the same internal control over financial reporting and internal audit procedures that would be followed if you were in the CEO’s shoes?
    • Are there any recommendations that you as the auditor have made and management has not followed?
  • Audit committees should not underestimate the importance of their role overseeing the external auditor as auditors are accountable to the board of directors through the audit committee and not to management.

Mr. Bricker’s speech is available at: https://www.sec.gov/news/speech/keynote-address-2016-aicpa-conference-working-together.html.

The FAST Act required the Securities and Exchange Commission to deliver to Congress a report detailing its recommendations regarding the modernization and simplification of the disclosure requirements contained in Regulation S-K.  Much of the work entailed by such a review of the Regulation S-K disclosure requirements already was reflected in the SEC’s Concept Release, as well as in the request for comment on the 400 rules, the proposed revised disclosures for mining registrations and the proposal regarding the definition of “smaller reporting company.”  Nonetheless the Report contains a few specific recommendations, including, among others, the following:

  • Permitting the incorporation by reference of documents filed more than five years prior on EDGAR,
  • Allowing hyperlinking of exhibits,
  • Consolidating the rules relating to incorporation by reference,
  • Revising the item 102 requirement relating to descriptions of properties,
  • Revising the MD&A disclosure requirements to eliminate repetition, and
  • Permitting the omission of attachments and schedules filed with exhibits (unless they contain material information that is not otherwise disclosed).

Here is a link to the Report:  https://www.sec.gov/reportspubs/sec-fast-act-report-2016.pdf.

To learn more, read our client alert:  https://media2.mofo.com/documents/161129-section-72003-fast-act.pdf.