Disclosure Guidance

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Remember when you were a kid and you didn’t clean up your room or do something else you were supposed to do, and a parent would say “How many times do I have to tell you…?”  Well, the same holds true for perquisites disclosure.

Not quite four months ago, I wrote about an SEC enforcement action involving perquisites and the importance of paying close attention to perks.  Well, the SEC has done it again.  Two enforcement actions in four months may not a trend make, but as we approach the end of the calendar year – and the onset of the 2021 proxy season – a reminder seems in order.

The recent enforcement action, concluded at the end of September, sounds similar to so many other sagas of nondisclosure of perks.  In this case, the company disclosed “All Other Compensation” just shy of $600,000 over a four-year period.  The compensation included “certain personal travel and lodging costs.”  However, according to the SEC, the company failed to disclose $1.7 million of “travel-related perquisites and personal benefits,” consisting of personal use of corporate aircraft, expenses associated with hotel stays, and taxes related to both items.  It seems hard to overlook $1.7 million, but it’s not the first time it’s happened, and it almost surely will not be the last.
Continue Reading Perquisites Disclosure: “How Many Times Do I Have to Tell You?”

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How did we get here?

On September 11, 2020, the SEC adopted new rules to “update and expand the statistical disclosures” that bank holding companies, banks, savings and loan holding companies, and savings and loan associations are required to provide to investors. The old regime – Industry Guide 3, “Statistical Disclosure by Bank Holding Companies” – had not been meaningfully updated for more than 30 years.  There have been all sorts of developments since then, including new accounting standards, a financial crisis, and new disclosure requirements imposed by banking agencies. So it’s not surprising that the SEC began questioning the need to make changes to Industry Guide 3, requesting comments in 2017 and again with a proposed rule in September 2019.

So, what’s new?

The changes were implemented in part to eliminate overlaps with disclosures already required under SEC rules, U.S. GAAP, and International Financial Reporting Standards (“IFRS”), as well as to incorporate new accounting standards. Under the new rules, disclosures are required for each annual period presented (as well as any additional interim period should a material change in the information or trend occur), aligning these disclosures with the annual periods for financial statements.
Continue Reading Out with the old, in with the new: Banks and S&Ls must now provide updated and expanded statistical disclosures

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On August 26, 2020, the SEC continued to keep its foot on the gas with respect to its recent practice of modernizing disclosure rules by adopting amendments to the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. As discussed in a previous post by my colleague, Bob Lamm, regarding the rule changes as originally proposed on August 8, 2019, the changes significantly update the provisions of Regulation S-K and signal a continuing shift to a principles-based approach to disclosure. The SEC gave the green light to the amendments substantially as proposed in 2019, with some minor modifications. Details of the final amendments are included below. The previous post provides commentary on some of the rule changes and some observations regarding the potential impacts of the shift to a principles-based approach to disclosure on registrants and their advisors.

In its press release announcing the amendments, the SEC acknowledged that these updates were due – actually, overdue – after decades of evolution in the capital markets and the domestic and global economy without any corresponding revisions in the disclosure rules. SEC Chairman Jay Clayton stated that  the improvements to these rules “are rooted in materiality and seek to elicit information that will allow today’s investors to make more informed investment decisions,” adding that the revisions “add[] efficiency and flexibility to our disclosure framework.”
Continue Reading Pedal to the metal on principles-based disclosure

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As noted in a prior post, every now and then the SEC Enforcement Division likes to remind companies of the requirement to disclose personal benefits, or perquisites.  I’d even hazard a guess – completely unsubstantiated by research – that enforcement actions regarding perquisite non-disclosure make up a significant percentage of enforcement actions concerning proxy statements.

And yet, companies seem to keep forgetting about perks disclosure.  In some cases, the companies’ disclosure controls may not capture perquisites, but my hunch – again, unsupported by research, but this time supported by experience – is that companies and, in particular, their executives, manage to persuade themselves that the benefits in question have a legitimate business purpose and thus are not personal benefits at all.  Over the course of my career, I’ve heard hundreds if not thousands of reasons why a seemingly personal benefit should be treated as a business expense.  Here are just a few:
Continue Reading When it comes to perquisites, caveat discloser

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Aristotle is said to have coined the phrase “nature abhors a vacuum.”  Far be it from me to question Aristotle, but while he was right, I think his view was too narrow — the abhorrence of vacuums goes far beyond nature and extends to investors and the media, among many others.  Companies that hide behind closed doors and ignore or deny requests for information from investors and the media run the risk of finding themselves without a welcoming audience when they eventually choose to communicate.

Let’s be clear – any securities lawyer worth his or her salt knows that sometimes the best thing to say is “no comment” or its equivalent.  I’ve given that advice very often. The problem is that in my experience, most of the time when a company says “no comment” or “we don’t respond to rumors,” the rumor is likely true.  Conversely, when the rumor is just that, a rumor, companies tend to squeal like a proverbial stuck pig.  For some reason, companies that engage in this sort of behavior fail to understand how it plays out among investors and the media.

It has also been my experience that securities attorneys all too often think they are smarter than their clients’ communications and investor relations advisors and disregard the advisors’ recommendations.  Even a smart lawyer isn’t likely to know more than these advisors about IR or communications – in fact, many lawyers are terrible communicators.  So it’s worth listening to and considering those advisors’ recommendations instead of dismissing them out of hand.  Personally, I’ve learned a great deal from investor relations and communications advisors.
Continue Reading Aristotle was right (or, “tell your story or someone else will”)

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.Continue Reading Analyze This!

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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…

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

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