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The SEC is re-examining one of the most important disclosures companies provide – Management’s Discussion and Analysis, or MD&A.  I’ve read lots of MD&As in my time, and to be completely candid, many of them – or at least too many of them – are poor.

There are lots of ways in which MD&As are poor, but my principal complaints are as follows:

  1. They don’t provide the “A” in MD&A – the analysis. Sales are up?  Great!  Why were they up?  Well, that’s anyone’s guess.  “Increased market acceptance of our product.”  Also great, but does “greater acceptance” mean that more units sold?  That customers were willing to pay more for each unit, so the company raised the price?  That the company expanded the markets in which the product is sold?  Beats me.
  2. Instead of discussing the “why’s,” companies do a cut and paste of key line items in their financial statements, sometimes with a “Percentage Change” column, indicating how much each line in, say, the P&L changed from period to period. In other words, they’re doing what any reader can do, which is precisely what prior SEC glosses on MD&A disclosure have said not to do.  And then they copy and paste sections of the notes to financial statements about how revenue is determined.  Again, no “why.”

I could rattle off a list of other weaknesses of many MD&As, but let’s move on.

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Continue Reading Analyze This!

Image by Ron Porter from Pixabay

Although Dodd-Frank was enacted in 2010, the rule needed to implement one of its provisions – the requirement to disclose hedging policies – only recently took effect.  In fact, for calendar-year companies, 2020 will be the first year in which the proxy statement will have…

Image by engin akyurt from Pixabay

In case you think that SEC Regulation FD is old news, think again.  A recent enforcement action makes it clear that Reg FD is alive and well.  (And, I might add, living in Boca Raton, Florida.)

Specifically, in an August 20 announcement, the  SEC announced that it had charged a Boca Raton-based pharmaceutical company with FD violations “based on its sharing of material, nonpublic information with sell-side research analysts without disclosing the same information to the public.”  The more detailed allegations include the following:

  • In June 2017, the company privately advised analysts of a “very positive and productive” meeting with the FDA about approval of a new drug. The next day – before any public announcement – the company’s stock closed up nearly 20% on heavy volume.
  • One month later, the company issued an early morning press release that it had submitted additional information to the FDA but “did not yet have a clear path” regarding its new drug application. The stock declined 16% in pre-market trading following the issuance of the release.  However, after issuing the press release but before the opening of the market, the company provided analysts with previously undisclosed information about the June FDA meeting.   The analysts published research notes with these details, and the stock rebounded, to close “only” 6.6% down for the day.

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Continue Reading FD Lives!

In recent years, the SEC has made a number of incremental changes to make disclosures more effective – not only more meaningful and user-friendly for investors, but also helpful to those of us who prepare disclosures for our companies and clients.

The drive to make disclosures more effective seems to have kicked into a higher gear with the August 8 issuance of a proposal that may result in the most significant changes in the disclosure rules in more than 30 years.  The proposal would modify some key provisions of Regulation S-K, and in doing so would move considerably closer to a principles-based approach to disclosure.   Some details follow.…
Continue Reading Disclosure effectiveness goes into high gear

I recently came across an article reporting that the interim president of a state university system had failed to report a number of corporate board seats on his ethics forms.  That got me thinking about the forms he may have been asked to complete, which in turn got me thinking about D&O questionnaires.

Getting directors and officers to accurately complete and return questionnaires in a timely manner is one of the most frustrating tasks faced by corporate secretaries.  Years ago, I was speaking at a program for aspiring corporate governance nerds, when a young aspirant asked me if I had the secret to getting this task done.  If memory serves me correctly, my response was to the effect that if I had the answer to her question, I could retire.

However, I sometimes think that people who circulate questionnaires are their own worst enemies.  For example, a recent study reported that D&O questionnaires averaged 40 pages and 65 questions.  That means that some, perhaps many, questionnaires are far longer.  It’s unrealistic to expect someone with a life – much less a day job – to devote the amount of time necessary to complete a 40-page (or longer) questionnaire, particularly when many questions don’t lend themselves to simple “yes” or “no” answers.…
Continue Reading The lowly D&O questionnaire

In December 2014, I posted my concerns with the law on insider trading.  Perhaps someone read it, because the following year, H.R. 1625, the “Insider Trading Prohibition Act,” was introduced in the House of Representatives.  I regarded it as imperfect but a start.   Of course, it went nowhere, and the state of the law has not changed.

Well, it’s back – sort of – and may have a bit of life.   H.R. 2534, with the same title as in 2015, was introduced by Congressman Jim Himes (D-CT), who introduced the 2015 bill, and co-sponsored by Carolyn Maloney (D-NY) and Denny Heck (D-WA).  What’s new about the bill is that it was approved – unanimously – by the Financial Services Committee in May.  That probably doesn’t mean anything, as Congress seems to be the place where legislation goes to die, but I suppose anything is possible.

Like its predecessor, it’s a start.  But I still think it’s imperfect.  The title of the first section is promising: “Prohibition Against Trading Securities While In Possession Of Material, Nonpublic Information.”  Sounds good, right?  The mere possession of MNPI means you can’t trade.  Wrong.  The text of the section gives the lie to its title.  Specifically, the prohibition exists only if the person trading “knows, or recklessly disregards, that such information has been obtained wrongfully, or that such purchase or sale would constitute a wrongful use of such information.”  In other words, (1) the bill seems to say it’s OK to trade while in possession of inside information as long as the information was not known to have been obtained wrongfully or is being used wrongfully (whatever the latter means), and (2) it would get us right back into the very issues that make the present state of the law so confusing.  You can’t trade in a stock if you know (or should have known) that the MNPI was wrongfully obtained, but what if you don’t know or have no reason to know it was wrongfully obtained?  If someone suggests that you buy (or sell) a particular stock, what is your duty of inquiry, and where does it end?

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Continue Reading There STILL ought to be a law

As we previously reported, the SEC has adopted amendments to the public company disclosure rules intended to further streamline and simplify the reporting process for public companies. The amendments also significantly change the process for requesting and renewing confidential treatment of exhibits to SEC filings. Most of these amendments became effective on May 2, 2019. Below is a brief summary of several of the significant changes that resulted from these amendments.

Amendments to Form 10-K, Form 10-Q, and Form 8-K Cover Pages

Companies must now list on the cover page of Form 10-Q and Form 8-K each class of securities registered under Section 12(b) of the Exchange Act, the trading symbol, and the exchange(s) on which the securities trade, similar to the current requirements for the Form 10-K cover page. The cover page of Form 10-K was also modified to require the inclusion of the trading symbol for each class of registered securities, which previously was not required to be provided. The new Form 10-K cover page will also no longer include the checkbox related to delinquent filers under Section 16.

Description of Material Properties

Item 102 of Regulation S-K was revised to encourage disclosure regarding only material properties, plants and mines. The new rules make clear that it is acceptable for a company to determine that none of its properties are material for purposes of Item 102. However, the amendments do not alter disclosure requirements for companies engaged in the real estate, mining, and oil and gas industries, in which physical properties may be of particular importance. Companies in these industries must continue to comply with the existing instructions to Item 102 and applicable SEC industry guides governing their industries.…
Continue Reading Streamlined and modernized: new FAST Act rules become effective

Four years ago, I commented on the then-recent announcement that Jamie Dimon, Chairman and CEO of JP Morgan Chase, was battling cancer.  At the time, Dimon noted that he had struggled with whether the company should disclose his illness.

It’s a struggle that executives, companies, and their securities lawyers face when a CEO is diagnosed with a serious illness, or when there is some other arguably personal news about the CEO.  With apologies for quoting myself, here is an excerpt from my 2015 posting:

“It’s a very challenging issue for several reasons.  First, there isn’t any rule – or even any literature (at least to my knowledge) – that tells us whether and what to disclose in this situation.  So when a client says, “show me the rule that says we have to disclose this,” there’s nothing to show.  Second, and more important, the issue pits the need to disclose against information that is quintessentially personal.  It’s also not just an issue between the executive and the company; often, the executive’s family and, possibly, his/her medical team and others are equally involved.  And even when there’s agreement to disclose, it’s very difficult to know what to say about the prognosis, if and when the executive can return to work, and so on.”

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Continue Reading In sickness and in health 2.0

As our readers know, I am irritated by Congress’s penchant for naming bills so as to create nifty acronyms. And for including provisions that have nothing to do with the name or the acronym.  However, I can better put up with these irritants when the legislation – and SEC regulations implementing the legislation – create a good result.

Such is the case with the FAST Act. It stands for “Fixing America’s Surface Transportation Act,” and despite its acronymic name and its questionable connection to securities law, it contained some provisions to make disclosures more effective and the process by which disclosures are made somewhat easier.

These benefits were engraved in stone by the SEC on March 20, when it adopted a series of rules under the FAST Act. The rules provide for the following types of relief:…
Continue Reading Disclosure effectiveness on a FAST track (get it?)

SEC Rule 701 exempts non-reporting companies from registering securities offered or sold to employees, officers, directors, partners, trustees, consultants, and advisors under compensatory benefit plans or other compensation agreements. As discussed in an earlier post, under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, the threshold for the aggregate sales price of securities sold during any consecutive 12-month period that triggers additional disclosure requirements under Rule 701 was increased from $5 million to $10 million.   What may have gone unnoticed was that the SEC has adopted final rules to implement EGRRCPA and has published a concept release “soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999.”
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Continue Reading The SEC modernizes exempt compensatory offerings (with more changes in the works)