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There was good news and bad news from the SEC this week.

First, the good news.

It’s unofficial, but Bloomberg reported this week that the SEC is “shelving” its proposed overhaul of Form 13F.  (Hopefully, “shelving” doesn’t mean being put on the shelf to be taken down later on, as in a shelf registration.  In a hopeful sign, the Bloomberg piece says that “some within the [SEC] have been notified it’s dead.”)  As readers of this blog know, I was not a fan of the overhaul;  from my perspective, it was a misstep in what has otherwise been a run of pretty good rulemaking by the SEC.

As if to prove that investors and companies sometimes have more in common than one might think, the proposal was criticized by a broad swath of groups.  Companies objected to the fact that it would make it even harder to identify and communicate with their investors (that was the major concern I expressed in my blog posting).  But investors weren’t happy with it either; some questioned whether the proposal would generate the cost savings the SEC cited as one of the principal benefits.  In fact, the Bloomberg article cites a Goldman Sachs study to the effect that of the 2,238 comment letters received on the proposal, only 24 supported it.

The article states that the SEC “still believes that the…trigger [for 13F filings]…hasn’t been altered in four decades [and] needs to be changed.”  True, perhaps, but the SEC’s approach was to throw out baby (i.e., the benefits of 13F filings) with the bathwater.  The SEC is also quoted to the effect that “[t]he comments received illustrate that the form is being used in ways that were not originally anticipated.”  Also true, but that speaks to many larger issues, including so-called proxy plumbing, that the SEC needs to address.  In the meantime, this quick fix was not a fix at all.

Now for the bad news.
Continue Reading Good News, Bad News

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While we have been busy in 2020 learning how to social distance, wear masks and do Zoom meetings, the SEC has spent the year turning out a relentless tsunami of new rules and amendments of old ones. Among the latter are extensive amendments to the financial disclosure obligations of a public company when it acquires or disposes of a business. Adopted in May 2020, these long-awaited amendments go into effect on January 1, 2021, so a summary seems timely.

Given the extent and complexity of these amendments, we will summarize them in installments. This first installment considers the changes to the periods to be presented in the financial statements, the amendments to the Investment Test and the Income Test in the definition of a “significant subsidiary,” and the codification of the staff practice of permitting abbreviated financial statements for acquisitions of components of an entity. In reading this and future summaries, bear in mind that the new rules are complex and need to be reviewed carefully against the detailed terms of an acquisition or disposition.
Continue Reading The SEC Fixes those Pesky M&A Financial Disclosure Requirements

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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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For both public and private companies, it’s important to determine the skills and other attributes needed to form a good or, hopefully, great board.  Of course, there are basics that always apply, such as integrity, intelligence, and a good mix of collegiality and candor.  However, once you get past those basics, it’s desirable to figure out what the organization really needs.  If the company has a consumer-facing business, you probably want to have a director or two with experience in that and related fields, such as marketing.  If it’s a defense contractor, you likely need someone with expertise in government relations.  And so on. However, in searching for and, hopefully, finding those board members, it’s also desirable to find individuals whose abilities extend beyond a single area of experience or expertise.

The notion of avoiding such “one-trick ponies” came to me while reading an article in a recent article in the Financial Times.  Since a subscription may be needed to access the article, the headline reads “US companies urged to appoint Covid-19 experts to boards.”  In fairness, the headline was a bit misleading; the article itself said that “the dean of Harvard’s school of public health has called on companies to put public health professionals [i.e., not Covid-19 experts] on their boards… to manage a pandemic threat that could hang over businesses for years.”
Continue Reading One-trick ponies and hordes of directors

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From where I sit, the SEC under the chairmanship of Jay Clayton has generally done a good job for public companies.  It has adopted a number of rules and amendments that make disclosure more effective without appreciably adding to – and in some cases reducing – the burdens on public companies.  Examples include streamlining financial disclosure requirements, rationalizing the definitions of “smaller reporting company”, “accelerated filer”, and “large accelerated filer”, and revising the rules governing financial statements of acquired and disposed businesses (although the latter do not take effect until 2021). And let’s not forget the very recent rule changes affecting proxy advisory firms, including a critical requirement that those firms provide companies with their voting recommendations.

While I wish that the SEC had also focused on proxy plumbing, it’s still a pretty good record, and it’s only a partial listing.

However (you knew there would be a “however”), I’m profoundly disappointed in the SEC’s proposal to “fix” Form 13F – the form on which large investment managers report their equity holdings of public companies.  While it’s nice that the SEC has turned its attention to a form that has long been in need of updating, the proposal seems to me to be unacceptable in at least two major respects.
Continue Reading 13F proposal — the SEC can (and should) do better

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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”)

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The pandemic seems to raise new challenges every day – or possibly every hour – in both our personal and work lives.  However, at least one of the challenges is not so new; namely, if and when to disclose that a CEO or other senior officer is infected with coronavirus.

I have expressed my views on disclosure of a CEO illness a couple of times in the last few years (see here and here).  Simply stated, I think a CEO’s serious or potentially serious illness should almost always be disclosed.  In some cases, he or she is the alter ego of the company; the CEO’s name is practically a household word, and his or her name is synonymous with that of the company.  However, even when that is not the case, the CEO is (or at least should be) the most important person in the company.  Certainly, if you read proxy statement disclosures, the CEO’s compensation is frequently justified on the basis that his/her leadership is very important, if not critical, to the company’s future; why else would or should he/she make the really big bucks and have so many financial reasons to stay with the company?


Continue Reading Disclosure as disinfectant