August 10, 2015

General Solicitation & Reg D: Corp Fin Issues 12 New CDIs (& a No-Action Letter)

Last Thursday, Corp Fin issued 11 Securities Act Rules CDIs (256.23 – 256.33) & one Securities Act Forms CDI (130.15). The 11 Securities Act Rules CDIs provide guidance on “general solicitation” under Rule 502(c) and the Securities Act Forms CDI relates to Form D.

In addition, Corp Fin granted this no-action letter to Citizen VC – an online venture capital firm – which was requesting that the Corp Fin Staff concur with its process for creating substantive, pre-existing relationships with prospective investors over the Internet and that resulting offers & sales under Rule 506(b) of limited liability company interests would not constitute general solicitation or general advertising under Rule 502(c) of Regulation D.

Disclosure of Engagement Partners: Fourth Time’s a Charm?

Here’s news from Baker & McKenzie’s Dan Goelzer: For the fourth time since 2009, the PCAOB is soliciting comment on requiring public disclosure of the name of the engagement partner, and of certain other audit participants, in connection with audits performed under the PCAOB’s jurisdiction. On June 30, the Board issued a supplemental request for comment on a new proposed rule that would require auditors to file a form with the PCAOB disclosing the name of the engagement partner and the names of accounting firms, in addition to the signing firm, that participated in the audit. Comment on the PCAOB’s revised proposal is due by August 31, 2015.

This new proposal follows a 2009 PCAOB concept release on requiring engagement partners to sign audit reports in their own name; a 2011 proposed rule that would have required the name of the engagement partner, along with information concerning other participating firms, to be included in the audit report; and a 2013 release re-proposing the 2011 rule with somewhat narrower requirements regarding the disclosure of other audit participants. See November-December 2013 Update.

The PCAOB’s latest approach to engagement partner and participating firm disclosure would require the information be filed on a new PCAOB form, Form AP. Unlike the 2013 proposal, auditors would not be required to include the partner and participant names in the auditor’s report, although they could do so – in addition to filing the new form – if they desired. The auditor would be required to file Form AP each time it issued an audit report on the financial statements of a public company or an SEC-registered securities broker-dealer. Form AP would have to be filed 30 days after the auditor’s report is included in an SEC filing; in the case of an initial public offering, the deadline would be reduced to 10 days so that the information would be available before any road show. Since the objective of Form AP is public disclosure, the data reported would be “accessible through a searchable database on the Board’s website.”

Supporters of engagement partner disclosure argue that personal identification strengthens accountability and provide an added incentive for the engagement partner to perform his or her responsibilities with a high degree of care. Partner identification would also permit financial statement users to determine other audits for which the engagement partner has been responsible and to compile information regarding quality incidents, such a restatements, in which partners have been involved. Participating firm identification would permit users to determine whether the other firms involved – particularly non-U.S. firms – were subject to PCAOB inspection and, if so, to review the participating firms’ inspection reports.

The PCAOB’s prior attempts to require this type of disclosure have foundered on concerns about new liabilities to which engagement partners and participating firms might become subject, and, as a corollary, delays that might result in the ability of companies to raise capital when audit opinions are incorporated into Securities Act public offering registration statements. In the case of a public offering, the engagement partner and the participating firms would have to file written consents to liability as a result of their names appearing in the audit opinion. In some cases, these consents might be difficult or impossible for the company seeking to make the public offering to obtain. The PCAOB believes that including partner and participant names in a filing, rather than in the audit report, will avoid the consent problem.

Comment: It is debatable whether the SEC or the PCAOB should have primary responsibility for requiring these types of audit-related public disclosures. The SEC audit committee disclosure concept release, issued at the same time as the new PCAOB proposal, raises the possibility of an SEC rule requiring the audit committee to disclose the name of the engagement partner and information concerning other accounting firms that participated in the company’s audit. If the SEC were to decide to adopt such a requirement, there seems to be no reason for the PCAOB to require the same disclosure in a PCAOB filing. In light of the SEC’s broad statutory responsibility for disclosure-based investor protection, the issue of whether and how this type of information should be disclosed would seem to fall squarely within its jurisdiction.

From an audit committee perspective, mandatory engagement partner identification – regardless of the source of the requirement – could have several consequences. As noted in the November-December 2013 Update, there is some evidence that partner identification results in increased audit costs. Further, audit committees would need to be aware of litigation, restatements or similar events arising in other audits for which their engagement partner was responsible, since the committee might face shareholder scrutiny regarding whether to change engagement partners when such events in other audits seem to reflect poorly on the partner.

In addition, as the PCAOB’s release acknowledges, partner identification could result in a rating, or “star,” system in which particular engagement partners were in high demand and others viewed as less desirable. This would add a new dimension to the task of selecting an auditor and require deeper audit committee involvement in the choice of the engagement partner.

More on our “Proxy Season Blog”

We continue to post new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Shareholder Engagement: TIAA-CREF
– Delaware Weighs In: Plain Vanilla Advance Notice Bylaws
– Some Ways to Shorten 10-Ks & 10-Qs
– Shareholder Proposals: Doing Research Through Free Databases
– Chamber: Report on How to Deal With Proxy Advisor Conflicts

– Jeff Werbitt