January 15, 2003
Today, the SEC held an
Today, the SEC held an open Commission meeting to consider a variety of rulemaking (the Commission will adopt 9 rules and present 4 major studies during the next 2 weeks). The SEC adopted final rules on pro formas and filing of earnings releases; black-out pension funds; code of ethics for senior officers; and “audit committee financial experts”. The SEC delayed the adoption of rules relating to internal control reports and analyst certifications.
A. Financial Expert – As for “audit committee financial expert” (which term has been expanded from “financial expert”), the SEC listened to the 200 commentators that thought that the proposed definition of expert was too narrow. Accordingly, the definition has been significantly liberalized compared to the proposal.
Under the final rule, companies must disclose whether they have such an expert – and if not, why not. This rule is effective for fiscal years ended 7/15/03 or later (except for small business issuers, which take effect for fiscal years after 12/15/03). The rule does apply to foreign private issuers.
“Audit committee financial experts” must have five attributes:
1. understanding of financial statements and GAAP;
2. assess general application of GAAP in connection with accounting for estimates, accurals, and reserves;
3. experience preparing, auditing, analyzing, evaluating financial statements that present level of complexity of accounting issues comparable to the breadth of the issues that could reasonably be expected to be presented by the company’s financial statements;
4. understanding of internal controls; and
5. understanding of audit committee functions.
In addition, such persons must acquire such attributes through education and experience as a CFO, chief accounting officer, controller, public accountant, auditor or position that performs similar functions – including experience “actively supervising” one or more of the above named persons. This would seem to include CEOs – but the adopting release will clarify that “active supervision” means “hands-on” supervision and not just someone higher on an organization chart (so CEOs might well not fit).
A safe harbor in the rule states:
– designation as an “audit committee financial expert” will not deem such person as an “expert” for securities law purposes
– designation does not impose additional duties or liabilities as compared to other audit committee members (in the absence of express imposition of such duties and liabilities)
– designation does not impact the duties or liabilities of other audit committee members
B. Pro Formas/Earnings Releases [thanks to Mike Holliday for his notes here!]
The SEC modified its proposal so that Reg G will not apply to non-GAAP information included in disclosure already subject to SEC detailed requirements covering business combinations.
The non-GAAP definition will not include measures required to be disclosed by GAAP or SEC rules or a system of regulation applicable to the registrant. In addition, EBITDA will be exempt from the prohibition on excluding charges or liabilities that
required or will require cash settlement, or would have required cash settlement absent an ability to settle in another manner.
Item 10 of Form 8-K was changed so that non-GAAP per share measures will generally be permitted. In addition, the Reg G provision permitting forward-looking non-GAAP measures where comparable quantitative information is not available without
unreasonable effort will also apply to Item 10 SEC filings. Also, the provision on information subject to SEC disclosure requirements covering business combinations in Reg G will be included in Item 10.
Form 8-K will require submission of earnings releases and announcements on Form 8-K. Note that this applies to results for completed fiscal periods and does not apply to forecasts for future periods. Also, the 8-K requirement applies whether or not the release or announcement contains non-GAAP measures. The 8-K requirement was modified so that it will not require that earnings releases and announcements be “filed” on Form 8-K, but will permit a company to “furnish” the release or announcement on Form 8-K. If “furnished”, Item 10 of S-K will not apply. (Of course, Reg G will always apply if non-GAAP measures are included.)
A new Item 12 of Regulation S-K will be created that will apply to earnings press releases and announcements that are “furnished” on Form 8-K. Item 12 will require reconciliation to GAAP, equal or greater prominence for comparable GAAP measures, purpose for using non-GAAP and why management believes non-GAAP provides useful information to investors. One Form 8-K could
satisfy the new 8-K requirement and Regulation FD. (The FD timing requirement would have to be met.)
The related SEC press release is at http://www.sec.gov/news/press/2003-6.htm.