© Michael Sutton-Long
In recent weeks, the SEC has given public companies some new menu items, including the following:
- On June 1, the SEC adopted an “interim final rule” that permits companies to include a summary of business and financial information in Annual Reports on Form 10-K. The rule implements a provision of the Fixing America’s Surface Transportation Act, or FAST Act, in keeping with the new trend to give statutes names that someone thinks make nifty acronyms. (Of course, the connection between this rule and surface transportation remains a mystery.)
- On June 13, the SEC issued an order permitting companies to file financial statement data in a format known as “Inline XBRL” rather than filing such data in exhibits to a filing.
Here is a quick review of these new menu items.
The new, improved 10-K summary – The rule permitting a 10-K summary is interesting in several respects. First, companies have long been able to provide summaries; in other words, there doesn’t seem to have been any reason for the “new” rule. Second, as noted, it permits but does not require the use of summaries; thus, companies that have not provided summaries in the past and don’t want to now don’t have to. Continue Reading
Photo by Carlo De Pieri
President Barack Obama signed into law Wednesday, May 11th, a bill that will provide protection for trade secrets on the federal level.
This new legislation, called the Defend Trade Secrets Act of 2016, or DTSA, has been hailed by commentators as an extremely significant addition to federal intellectual property law. The DTSA was created as an amendment to the Economic Espionage Act of 1996 to provide civil remedies for trade secret violations under federal law. While some potential issues exist, I believe that this new law should be beneficial to many companies because of the possible increased trade secret protection and aggressive potential remedies that it will provide.
Trade secret protection in the U.S. has primarily been available under applicable state law. The Uniform Trade Secrets Act provides some consistency, and it has been adopted by 48 states. The trade secret laws of the various states are not totally uniform, however, and this has sometimes made it difficult for companies to protect their trade secrets under the various state laws. Legal actions involving trade secret protection have generally been brought in state courts. Since the DTSA is a federal law, more trade secret actions will now be able to be brought in federal court, providing an additional potential venue for these actions.
The DTSA does not replace or preempt existing state laws. As a result, this could be an advantage to companies as it may provide a separate method of protecting their trade secrets. The DTSA also defines trade secrets a little more broadly, using “public economic value” as the heart of the trade secret definition. This broader definition of what constitutes a trade secret may expand the range of information that a company can claim as a trade secret.
That said, there is a potential problem here: the DTSA does not provide a uniform system of trade secret law and instead establishes a federal level of trade secret law on top of the existing states’ trade secret laws. This could increase the number and the complexity of legal actions involving trade secrets. Therefore, a company that wishes to assert a trade secrets action will need to analyze which court — state or federal — will be more advantageous, and this will likely vary with the different circumstances of each situation.
The DTSA contains fairly aggressive potential remedies that may be advantageous to companies which believe that a trade secret violation has occurred. The provision that has drawn the most interest is the ability of a court to issue an ex parte seizure order in certain extraordinary circumstances. Continue Reading
It’s almost exactly one year to the day since I took Senator Elizabeth Warren to task for what I believed was an unwarranted and particularly vicious attack on the SEC – or, rather, Chair White’s tenure at the SEC. Apparently, Senator Warren decided to celebrate the anniversary with another attack on the SEC and Chair White at a Senate Banking Committee hearing. (You can watch the entire unpleasantness here, including Senator Warren’s refusal to allow Chair White to answer any of her questions before launching another attack.)
This time, the attack was directed to the SEC’s “effective disclosure” project – something that many companies and investors support – claiming that by pursuing this project the SEC is putting companies’ interests ahead of investor protection and demanding that Chair White provide evidence to justify that investors are suffering from information overload. Her comments to Chair White included the following: “Your job is too look out for investors, but you have put the interests of the Chamber of Commerce and their big business members at the top of your priority list.”
Really? Perhaps Ms. Warren should ask some investors to testify. She might learn that many investors do not read disclosure documents, particularly proxy statements (which will soon contain the pay ratio disclosures that she once said should be the SEC’s highest priority), because they are too long and investors just don’t have the time. She might also learn that many investors applaud the SEC’s initiative, because it is designed to enhance some disclosures rather than just eliminate them. Continue Reading
Over the years, the PCAOB has developed a reputation for pursuing zombie proposals – proposals that appear to be dead due to widespread opposition and even congressional action. Remember mandatory auditor rotation? It practically took a stake through the heart to kill that one off, and I’m informed that even after it was presumed to be long gone some PCAOB spokespersons were telling European regulators that it might yet be adopted.
Well, here we go again. The latest zombie proposal (OK, reproposal) would modify the standard audit report in a number of respects, the most significant of which would be to require disclosure of “critical audit matters”. The headline of the PCAOB’s announcement of the reproposal says that it would “enhance” the auditor’s report; not clarify, just “enhance”. And, as is customary whenever the PCAOB proposes to change the fundamental nature of the audit report, the proposal starts out by sayng that’s not the intention at all: “The reproposal would retain the pass/fail model of the existing auditor’s report,” it says. It seems to me to lead to the opposite result – the introduction of critical audit matter (“CAM”) disclosure could easily lead to qualitative audit reports; one CAM would be viewed as a “high pass”, two would be ranked as a medium pass, and so on, possibly even resulting in numerical “grades” based upon the number of CAMs in the audit report. And let’s not fool ourselves into thinking that any audit firm would ever issue a clean – i.e., CAM-free – opinion. I just can’t envision that happening, ever.
© Alex Harbich
Until recently, I’ve firmly believed that the SEC’s use of the bully pulpit can be effective in getting companies to act – or refrain from acting – in a certain way. Speeches by Commissioners and members of the SEC Staff usually have an impact on corporate behavior. However, the use of non-GAAP financial information – or, more correctly, the improper use of such information – seems to persist despite jawboning, rulemaking and other attempts to stifle the practice.
Concerns about the (mis)use of non-GAAP information are not new. In fact, abuses in the late 1990s and early 2000s led the SEC to adopt Regulation G in 2003. It’s hard to believe that Reg G has been around for 13+ years, but at the same time it seems as though people have been ignoring it ever since it was adopted. Over the last few months, members of the SEC and its Staff have devoted a surprising amount of time to jawboning about the misuse of non-GAAP information; for example, the SEC’s Chief Accountant discussed these concerns in March 2016; the Deputy Chief Accountant spoke about the problem in early May 2016; and SEC Chair White raised the subject in a speech in December 2015. And yet, the problem seems to persist.
Photo by Michael Tipton
The SEC’s crowdfunding rules (under Regulation Crowdfunding) became effective earlier this week. From the legal and legislative perspectives this was a big day since it marked the effective date of
one of the most heavily anticipated and promoted components of the JOBS Act. It is also the last provision of the JOBS Act to be put into practice. Reward-based crowdfunding has been operational for a long time and has had some pretty positive results, but the SEC’s equity crowdfunding rules were going to be a way for small investors to make equity investments in small companies and help foster the growth of the tech and innovation economies.
Unfortunately, as reported in my prior blog post and just about everywhere else, the execution of the final crowdfunding rules has resulted in a system that is probably not viable for most situations. While the new rules may work in some cases, they create barriers that I believe will prevent widespread use of equity crowdfunding as a financing vehicle. One of the best summaries of Regulation Crowdfunding problems and deficiencies can be found in this post which quotes Jeff Lynn, the CEO of Seedrs (a prominent crowdfunding platform). He is certainly a guy who believes in the crowdfunding concept, but he says that the crowdfunding regulations in their current form are not workable. Lynn also advises US regulatory authorities to study the UK crowdfunding model, which he believes allows companies to raise funds while still providing investor protection.
The main problems with the new crowdfunding regulations are practical ones. First, the funding limit of $1 million each year is just too low for most companies. This is similar to the problem that we saw with Regulation A for a long time – essentially no one used it because the limit was too low in relation to the costs (although the old Regulation A limit was $5 million, substantially higher than the current crowdfunding limit). Regulation A+ has fixed this problem for Regulation A offerings, but the low limit remains a huge challenge for crowdfunding offerings. This low limit problem is made worse by the costs associated with a crowdfunding offering, which will be substantial for a small company. Legal and accounting work will be required. Companies must also use a registered funding portal in connection with the offering, and this will add to the cost burden. Finally, companies cannot “test the waters” before beginning an offering to see if the offering is even viable for them. The combination of all of these factors creates significant practical roadblocks for crowdfunding that cannot be overcome without some adjustments (as discussed below). Continue Reading
Photo by Jan Tik
In business, we’ve all seen the traditional nondisclosure agreement (also known, more simply, as the “NDA”) between two parties wishing to discuss a potential business transaction. While NDAs are good tools to protect a party’s confidential information during such discussions, businesses must take care to ensure that an NDA does not jeopardize the strong protections traditionally available to them under state laws.
State trade secret laws can provide substantial protection to certain confidential information, including trade secrets. These protections generally apply to information or materials that (1) have independent economic value; and (2) are kept “secret” by the owner. Importantly for purposes of meeting the secrecy requirement, most state laws provide that, so long as the owner takes measures to protect the secrecy of the information or materials that are reasonable under the circumstances, the requirement will be deemed met. Entering into an NDA sure sounds like at least one reasonable measure to protect the secrecy of a business’ confidential information, including its trade secrets. But business must beware: certain provisions of NDAs, if not properly addressed, could endanger state law protections regarding trade secrets. These provisions generally fall into one of two categories:
1. The term of the NDA. In many cases, the term of the NDA is limited to a one, two or three year period. The issue with NDAs of limited duration stems from the fact that, once expired, the recipient of trade secrets under the NDA might have no duty to keep such information or materials confidential. Under these circumstances, once the NDA has expired, some courts may find that the owner of a trade secret is no longer taking reasonable measures to keep its trade secret a “secret.” As a result, the relevant information or materials may lose trade secret protections under state law.
On its face, the obvious solution to this problem Continue Reading
Photo by David Fulmer
Over the past couple of months, the FASB has been busy. I wanted to point out one recent change and my thoughts on its impact.
FASB has “simplified” share-based compensation accounting. I will always have a special place in my heart for old FAS123 since it was on my CPA exam a couple of decades ago. Nevertheless, much has changed since then (APB No. 25 anyone?), including most recently:
- No more APIC pools. Currently, tax benefits in excess of compensation cost are recorded in equity (specifically, Additional Paid In Capital or APIC). The accumulation of excess benefits has been known as an APIC pool. Tax deficiencies decrease the APIC pool. Under the new accounting rules, excess benefits and deficiencies are recognized in the period in which they occur.
My Take – Expect more income tax expense volatility from period to period. If the changes impact tax expense significantly, we could see more non-GAAP financial measures develop. Just be careful of the renewed focus on non-GAAP financial measures from the SEC.
- No longer need to estimate forfeitures. GAAP currently requires you to estimate the number of awards that will be forfeited to calculate a more accurate amount of compensation cost each period. Under the new rules, you can continue to estimate or you can just reverse the compensation previously expensed when the forfeiture occurs. If you choose the new route, then you will have to hit retained earnings for the cumulative-effect adjustment incurred as a result of the change as of the beginning of the year the change is applied.
My Take – Again, there could be potentially more volatility if you elect to apply the new “actual” forfeiture approach. A good example of volatility would be if a company had a significant layoff of employees. The increase in forfeitures during the layoff period would significantly Continue Reading
On April 13, the SEC authorized the issuance of a major concept release. Concept releases are trial balloons that the SEC publishes to elicit input on possible rulemaking, including whether rulemaking is needed and what form it should take if it happens. The April 13 concept release is entitled “Business and Financial Disclosure Required by Regulation S-K”. Given that Regulation S-K spells out many of the disclosure requirements applicable to all sorts of Exchange Act filings, it’s bound to be significant.
The concept release is a very large trial balloon indeed – it runs to nearly 350 pages – and I have yet to crack it open. However, I do intend to read it. And I urge you to do the same, as it’s likely to impact disclosure requirements for the next generation.
Some preliminary thoughts about the concept release, based upon press reports and the opening statements made by the Commissioners during the meeting at which the release was approved for publication: Continue Reading
One of the hottest topics in governance today is director refreshment. (No, that doesn’t refer to what your board members have for lunch.) Boards comprised of long-serving directors do, in fact, tend to be “pale, male and stale” – i.e., comprised of old white men. Self-perpetuating boards are less likely to be diverse, and there is increasing evidence that companies with diverse boards tend to perform better (the evidence demonstrates correlation rather than causation, but it’s still evidence). There is also a plausible argument that self-perpetuating boards are less likely to challenge long-standing assumptions and practices, leading to board (and corporate) stagnation.
Perhaps it’s a poorly kept secret, but companies and boards have been concerned about this for years if not decades. Even boards that don’t engage in much introspection are often aware that some directors do not contribute much. As a result, companies and boards have tried all sorts of devices to force board refreshment – term limits and/or age limits having been the most common. Unfortunately, these devices have not worked very well, perhaps because they may be inherently ineffective, and no doubt also because companies often move the goalposts – age limits are waived (because keeping director X is deemed to be “in the best interests of the company”, whatever that means) or creep upward, term limits force good directors to retire, etc. And so, corporate America continues to search for the right approach. Some companies have adopted extremely long term limits (15 years), and others have said that average tenure may not exceed X years, but it’s too soon to tell whether these or other newer approaches will succeed.