August 22, 2011

A Disturbing Trend: Congress Forcing Corporate Disclosure for Social Issues

On Friday, I blogged a member’s negative reaction to the obscure provision in Dodd-Frank that requires the SEC to adopt rules eliciting disclosure regarding “conflict minerals” in the Congo. Many corporate lawyers and others in the corporate community (which includes many shareholders) share that member’s reaction. Now, Rep. Carolyn Maloney (D-NY) has introduced a House bill entitled the “Business Transparency on Trafficking and Slavery Act” (H.R. 2759) that would require companies to disclose efforts to identify and address the risks of human trafficking, forced labor, slavery and child labor in their supply chains.

Although these bills are well-meaning, attempting to solve the world’s problems through SEC filings simply is the wrong – and very expensive – way to go. How in the world did Congress start thinking they should influence foreign policy, as well as domestic social and environmental issues, through SEC filings to the determent of shareholders? Well, before Dodd-Frank, Rep. Frank Wolf (R-Va.) used an omnibus appropriations bill in early ’04 to require companies to disclose business activities in countries designated by the State Department as sponsoring international terrorism (Wolf particularly was targeting Iran). Corp Fin’s “Office of Global Security Risk” was born.

And even before that, the SEC’s Y2K interpretive release in ’98 that elicited MD&A disclosures regarding risks associated with potential computer problems (yours truly is the contact person on that release!) was essentially forced upon the agency behind closed doors by some members of Congress. And before that, I would imagine there have been other closed door situations (perhaps the SEC’s interpretive guidance in ’88 that elicited disclosure of illegal or unethical activities relating to government defense contract procurements).

These older examples, however, didn’t involve actual legislation and thus could be quickly unwound by the SEC if found problematic. In comparison, the SEC doesn’t have any leeway to change a legislative provision that elicits unwarranted – and expensive – immaterial disclosures. When it comes to foreign policy or social issues, Congress should leave the disclosure process alone and not try to stick its pet projects on the backs of companies and their shareholders!

Rating Agencies Under Fire: Former Moody’s Analyst Breaks Silence

On top of the DOJ and Congressional investigations of S&P in the wake of the downgrading of the United States – one can only wonder how all three of the credit rating agencies have not been fully investigated in the years since the subprime crisis hit tilt – it appears that a former senior Moody’s analyst, William Harrington, has blown the whistle on his former employer in the form of his 78-page comment letter submitted to the SEC (read beyond the odd cover page), as described in this Business Insider article. Here is an excerpt from that article:

We’ve included highlights of Harrington’s story below. Here are some key points:

– Moody’s ratings often do not reflect its analysts’ private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings–and then vote with management to give the securities the higher ratings that issuer clients want.

– Moody’s management and “compliance” officers do everything possible to make issuer clients happy–and they view analysts who do not do the same as “troublesome.” Management employs a variety of tactics to transform these troublesome analysts into “pliant corporate citizens” who have Moody’s best interests at heart.

– Moody’s product managers participate in–and vote on–ratings decisions. These product managers are the same people who are directly responsible for keeping clients happy and growing Moody’s business.

– At least one senior executive lied under oath at the hearings into rating agency conduct. Another executive, who Harrington says exemplified management’s emphasis on giving issuers what they wanted, skipped the hearings altogether.

Will Corp Fin Comment on XBRL Exhibits?

Jill Radloff of Leonard Street & Deinard reports the following in her “ Blog“:

A review of many comment letters issued to date indicates so far the SEC has not routinely issued comments on the interactive data file, or XBRL, exhibits. The most frequent comment we found was regarding incorrectly checking the XBRL question on the cover page of Forms 10-K or 10-Q. Some of the other comments we found are set forth below.

Hyatt Hotels


Please tell us how you determined you are not required to submit electronically and post on your corporate Web site, Interactive Data Files pursuant to Rule 405 of Regulation S-T. Refer to Item 601(b)(101) of Regulation S-K.


Item 601(b)(101) of Regulation S-K states that an Interactive Data File is required to be submitted to the Commission and posted on a registrant’s corporate Web site based on the phase-in schedule outlined in Item 601(b)(101)(i)(A – C). Item 601(b)(101) of Regulation S-K also states that an Interactive Data File first is required for a periodic report on Form 10-Q.

Reference is made to Question 105.07 of the Commission’s Compliance and Disclosure Interpretations (“C&DIs”) of the Commission’s interactive data rules. The Company completed its Initial Public Offering in November 2009. As such, the Company first qualified as a “large accelerated filer” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2010. Following the guidance set forth in Question 105.07, because the Company did not qualify as a large accelerated filer until December 31, 2010 the Company was not required to submit Interactive Data Files until its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011 (the “1Q2011 Form 10-Q”). The Company filed its 1Q2011 Form 10-Q with the Commission on May 3, 2011. The Company then filed Amendment No. 1 to its 1Q2011 Form 10-Q with the Commission on May 20, 2011, the sole purpose of which amendment was to furnish Exhibit 101 to Form 10-Q in accordance with Rule 405 of Regulation S-T. In accordance with Rule 405(a)(2) of Regulation S-T, Amendment No. 1 to the 1Q2011 Form 10-Q was filed with the Commission within 30 days of the filing date of the 1Q2011 Form 10-Q.

Amdocs Limited


We note that you did not file the certifications required under Rules 13a-14(a) and 15d- 14(a) of the Exchange Act with your amendment to the Form 20-F for the fiscal year ended September 30, 2010. Please tell us how you considered including the required certifications in your amended Form 20-F and the reason for omitting such certifications.


Pursuant to Rule 405(a)(2) of Regulation S-T, the Company filed the Amended Form-20-F solely for the purpose of submitting its interactive data file for the fiscal year ended September 30, 2010 (the “Interactive Data File”). The Interactive Data File was prepared under the same disclosure controls and procedures in place during the Company’s preparation of the Form 20-F and reflects the same information about the Company’s financial condition, results of operations and cash flows that was reported in the Form 20-F. The Company believes that the certifications filed as exhibits to the Form 20-F, pursuant to Rules 13a-14(a) and 15d- 14(a) of the Exchange Act, are also applicable to the disclosure contained in the Amended Form 20-F.

According to the Commission’s Compliance and Disclosure Interpretations, Question 130.1 related to Rule 405 under the Securities Act of 1933, as amended (issued May 29, 2009) (the “C&DI”), in an amendment filed for the sole purpose of submitting its interactive data file, the Commission requires an issuer to include the cover page, an explanatory note, the signature page, an exhibit index, and exhibit 101. The C&DI does not state that that new certifications must be filed with such an amendment. Lastly, although the Company acknowledges that the practices of other issuers are not dispositive, the Company’s review of other public filings suggests that numerous other issuers take the position that new certifications are not required to be filed with an amended filing filed for the sole purpose of submitting an interactive data file.

Dr. Pepper Snapple Group


We note you calculated the aggregate market value of common equity held by non-affiliates to be $5,382,637,225 as of June 30, 2009, and that you did not indicate by check mark whether you have submitted electronically and posted on your corporate Website, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T. Please tell us whether you have filed such interactive data, and if not, explain to us why you have not provided the interactive data files pursuant to Rule 405 of Regulation S-T.


As more fully discussed in our public filings, we became a public company on May 7, 2008 with the spin-off by Cadbury plc of its beverages business in the United States, Canada, Mexico and the Caribbean. We became a “large accelerated filer” on December 31, 2009 under Rule 12b-2 of the General Rules and Regulations promulgated under the Securities Exchange Act of 1934.

Under Regulation S-K (Item 601(b)(101)(i)) an Interactive Data File is required to be submitted to the Commission and posted on the registrant’s corporate Web site in the manner provided by Rule 405 of Regulation S-T by “a large accelerated filer that had an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of more than $5 billion as of the last business day of the second fiscal quarter of its most recently completed fiscal year that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a fiscal period that ends on or after June 15, 2009”, except that an Interactive Data File is first required for a Form 10-Q.

Since we first became a large accelerated filer on December 31, 2009 and had market value in excess of $5 billion as of last day of our second quarter in calendar year 2009, under our reading of the above-noted rule, the first filing for which we would be required to file an Interactive Data File would be our Quarterly Report on Form 10-Q for the first quarter ended March 31, 2010 (“our next Form 10-Q”). As a result, we will file an Interactive Data File with our next Form 10-Q.

With respect to our decision to not indicate by check mark on the facing page of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (“our 2009 Form 10-K”) whether or not we had submitted the Interactive Data File electronically and posted it on our corporate website, we relied on Question 105.04 of the Compliance and Disclosure Interpretations posted by the Division of Corporation Finance, which provides that “[a] company should not start checking the cover page box relating to Interactive Data File compliance until it is required to submit those files”. In our view, at the time we filed our 2009 Form 10-K, we were not then required to comply with Rule 405 for the reasons noted above. We will check mark the facing page of our next Form 10-Q to indicate our compliance with the Interactive Data File rules.

– Broc Romanek