Disclosure Guidance

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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?)

On February 19, 2019, the Securities and Exchange Commission voted to propose a new rule that would expand the availability of the “testing-the-waters” provisions that enable eligible companies to engage in certain communications to gauge institutional investor interest in a proposed IPO. Currently, only companies that qualify as “emerging growth companies” or “EGCs” are eligible to test the water. The new rule and related amendments would expand the availability of the provisions to all types of issuers, including investment companies.

The purpose of the testing-the-waters provisions is to allow potential issuers to gauge market interest in a possible initial public offering or other registered securities offering by discussing the offering with certain investors, including qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”), prior to filing a registration statement. SEC Chairman Jay Clayton said that “[t]he proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.” The proposed rules and related amendments are intended to give more issuers a cost-effective and flexible means of communicating with institutional investors regarding contemplated offerings and evaluating market interest.Continue Reading Testing-the-waters provisions to be available to bigger fish

Lest you think that the SEC’s focus on the use of non-GAAP financial metrics is so, well, 2018, think again.  On December 26, the SEC issued a cease-and-desist order against a company based entirely on the company’s use of non-GAAP metrics without giving “equal or greater prominence [to] the most directly comparable financial measure or measures calculated and presented in accordance with GAAP…”, as required by Item 10(e)(1)(i)(A) of Regulation S-K.

According to the SEC order, the company in question – ADT, the security company based in Boca Raton, Florida – issued earnings releases for fiscal 2017 and the first quarter of fiscal 2018 that prominently included such non-GAAP metrics as adjusted EBITDA, adjusted net income, and free cash flow before special items, without giving equal or greater prominence to the comparable GAAP data.  For example, the order states:
Continue Reading Ho, Ho, Uh-Oh: The SEC continues to focus on non-GAAP disclosures

As we approach the end of 2018, it’s only natural to look back on some of the year’s events – and some non-events.  For my money, one of the most significant non-events was the inauguration of CEO pay ratio disclosure, one of the evil spawn of Dodd-Frank.

In the interest of brevity, I’ll skip the background of the disclosure requirement, except to say that it seemed intended to shame CEOs – or, more accurately, their boards – into at least slowing the rate of growth in CEO pay.  Some idealists may have actually thought that it would lead to reductions in CEO pay.  Poor things; they failed to realize not only that all legislative and regulatory attempts to reduce CEO pay have failed, but also that such attempts have in every single instance been followed by increases in CEO pay.

So the 2018 proxy season, and with it pay ratio disclosures, came and went.  Sure, there were media outcries about some of the ratios, but they failed to generate any traction.  Companies may have incurred significant monetary and other costs to develop the data needed to prepare the disclosures, but their concerns about peasants storming the corporate gates with torches and pitchforks proved needless.  Few, if any, investors – and certainly no mainstream investors – seemed to care about the pay ratios.  Employees making less than the “median” employee didn’t rise up in anger.  Even the proxy advisory firms seemed to yawn in unison.

So that’s that.  Or so you’d think.Continue Reading To pay ratio advocates, nothing succeeds like excess

Since the beginning of this month (July 2018), the SEC has brought two enforcement cases involving perquisites disclosure – one involving Dow Chemical, and one involving Energy XXI.  As my estimable friend Broc Romanek noted in a recent posting, over the past dozen years, the SEC has brought an average of one such case per year.  It’s not clear why the SEC is doubling down on these actions, but regardless of the reasons, it makes sense to pay attention.

The SEC’s complaint in the Dow Chemical case is an important read, as it summarizes the requirements for perquisites disclosure.  Among other things, it’s worth noting the following:

  • While SEC rules require disclosure of “perquisites and other personal benefits”, they do not define or provide any clarification as to what constitutes a “perquisite or other personal benefit.” Instead, the SEC addressed the subject in the adopting release for the current executive compensation disclosure rules, and it has also been covered in numerous speeches and other statements over the years by members of the SEC staff.
  • For those of you who prefer a principles-based approach to rulemaking, you win. Specifically, the adopting release stated as follows:

“Among the factors to be considered in determining whether an item is a perquisite or other personal benefit are the following:

  1. An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive’s duties.
  2. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

The SEC has also noted on several occasions that if an item is not integrally and directly related to the performance of the executive’s duties, it’s still a “perk”, even if it may be provided for some business reason or for the convenience of the company.Continue Reading Doubling down (literally) on perquisites disclosure

If you find the title of this posting confusing, let me explain:  On June 28, the SEC announced revisions to the definition of “smaller reporting company”that will significantly expand the number of companies that fit within that category (i.e., “smaller gets bigger”).  As a result, more public companies will be able to reduce the disclosure they are required to provide under SEC rules (i.e., “which means less”).  The new definition will go into effect 60 days after publication in the Federal Register.

Background

The SEC adopted the reduced disclosure requirements applicable to smaller reporting companies, or SRCs, in 2007. These reduced requirements were intended to ease the costs and other burdens of disclosure for small companies.  The reduced requirements enabled SRCs, among other things, to:

  • present only two (rather than three) years of financial statements and the related management’s discussion and analysis;
  • provide executive compensation for only three (rather than five) “named executive officers”;
  • omit the compensation discussion and analysis in its entirety;
  • present only two (vs. three) years of information in the summary compensation table; and
  • omit other compensation tables, pay ratio disclosure, and narrative descriptions of various compensation matters.

In addition, SRCs that are not “accelerated filers” (companies that must file their Exchange Act reports on an accelerated basis) need not provide an audit attestation of management’s assessment of internal controls, required by the Sarbanes-Oxley Act.  More on this below.
Continue Reading Smaller gets bigger, which means less (the new definition of “smaller reporting company”)

On February 21 the SEC issued a  “Commission Statement and Guidance on Public Company Cybersecurity Disclosures”. The Release contains new guidelines and requirements regarding public companies’ disclosure responsibilities for cybersecurity situations. No new rules or regulations have been issued at this point, but the Release contains some valuable guidance. It is also clear that cybersecurity is a hot button for the SEC and for Chair Clayton, and I believe that cybersecurity disclosure issues will be subject to more rigorous scrutiny going forward. All public companies should carefully review the Release and evaluate their disclosure obligations in connection with cybersecurity.

The Release updates the SEC’s position on cybersecurity. The SEC’s previous guidance in this area was primarily a Corporation Finance Division Release issued in 2011 that did not contain specific disclosure requirements. The cybersecurity landscape has changed radically since then. The substantial increases in the number and severity of cybersecurity incidents, coupled with the growing dependence of businesses on cyber systems and the associated problems that arise in a cybersecurity incident, have clearly convinced the SEC that additional disclosure is required.
Continue Reading SEC issues guidance on cybersecurity disclosure obligations (and more)

Photo by Allen

Now that “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (the official name of the 2017 tax reform act – fitting for a “simplification” of the tax code!) has passed, issuers are faced with reviewing the impact of the tax reform act on its balance sheet, specifically deferred tax assets and deferred tax liabilities.

For those of us who have ignored those lines on the balance sheet, here is a quick primer: US GAAP and the US tax code have different requirements as to when to recognize income and expenses. These timing differences result in either deferred tax assets or deferred tax liabilities. In other words, if the US tax code requires recognition of income this year, but GAAP does not recognize the income yet, an issuer will need to pay the tax on the income now (the government doesn’t like to wait for its money). That’s an asset from a GAAP perspective – the issuer essentially “prepaid” income taxes that weren’t yet due as far as GAAP is concerned. From a GAAP perspective, that deferred tax asset will be used to offset GAAP tax expense in future years. The opposite is true with respect to deferred tax liabilities.

When the corporate tax rate changes (in this case, from a maximum of 35% to a maximum of 21%) the deferred tax assets aren’t as valuable anymore because the issuer won’t be subject to as much tax as it originally thought. Therefore, the tax asset needs to be written down to some lower value. That write down hits the bottom line and will have a significant adverse impact on the issuer’s quarterly results. Again, for those issuers “lucky” enough to have had significant deferred tax liabilities, those issuers will have significant gains in the quarter caused by, in essence (by lowering the tax rate), the US government partially forgiving the payment of those accrued tax obligations.

Issuers over the past week have begun to provide guidance as to what they expect the effect of the tax cut to be for their deferred tax assets and deferred tax liabilities.  However, there is no black and white rule requiring disclosure in this case.  While Item 2.06 (Material Impairments) of Form 8-K may initially have been of some concern for those issuers who need to write off tax assets, Corp Fin put those concerns to rest when issuing a new CD&I last week (Question 110.02). Consequently, it comes down to anti-fraud concerns as to when and what to disclose. 
Continue Reading Tax cut implications – what and when to disclose

With Chair Jay Clayton and Corp Fin Director Bill Hinman now in office for several months, the SEC seems to be gaining traction in a number of areas of interest to
public companies.

Pay Ratio Disclosures

As we noted in a Gunster E-Alert, on September 21, the SEC issued interpretations to assist companies in preparing the pay ratio disclosures called for under Item 402(u) of Regulation S-K.  The consensus (with which we agree) is that the interpretations will make it much easier for companies to prepare their ratios and related disclosures and hopefully to reduce litigation exposure associated with those disclosures.Continue Reading Your tax dollars at work (at the SEC)

back-to-school-954572_1280My last post was a re-posting of Adam Epstein’s great piece on the importance of the proxy statement.  I promised that I would follow up on Adam’s thoughts with some recommendations of my own.  Here goes.

General

  • Manage your proxy statement “real estate” to maximize user-friendliness and create an optimal flow: Think about where things go.  For example, if your company is owned largely by institutions (and perhaps even if it’s not), should you lead off with an endless Q&A about the annual meeting and voting, discussing such exciting topics as the difference between record and beneficial ownership and how to change your vote?  Some of it is required, but consider taking out what’s not required and moving what is required to the back of the book.
  • Use executive summaries: Investors like them, and even the SEC has more or less endorsed their use. Think of it this way – whatever you think of ISS, it does a great job of summarizing your key disclosures, albeit not with your company’s best interests in mind.  Why pass up an opportunity to convey your key disclosures with those interests in mind?

Continue Reading Required reading (Part 2)