May 3, 2019

Next Thursday! SEC’s Open Meeting on “Large Accelerated” & “Accelerated Filer” Def’ns

Yesterday, the SEC posted this Sunshine Act notice of an open Commission meeting next Thursday – May 9th – to consider whether to propose amendments to the “accelerated filer” & “large accelerated filer” definitions and related transition thresholds (the Commission will also be discussing the cross-border application of rules for security-based swaps). The agenda says that any proposed amendments would be intended to promote capital formation for smaller reporting companies that are currently included in the larger filer categories.

When the SEC adopted the higher $250 million definition for “smaller reporting company” last year, the definitions of “accelerated filer” and “large accelerated filer” didn’t change. As a result, companies with $75 million or more of public float that qualify as SRCs are still subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting – and I blogged that that was a point of contention among the Commissioners.

We’ve blogged a few times since then about SEC Chair Jay Clayton’s desire to promote capital formation – and his view that the SOX 404(b) thresholds play into that. So a proposal to amend the definitions wouldn’t come as a surprise.

Audit Committee Independence: Still Important

We get a pretty regular stream of questions on our “Q&A Forum” to the effect of, “Is it really *that* important for our audit committee members to avoid any potentially conflicting relationships with the company?” And we know our members aren’t just making up these questions for fun – let’s just say, the enhanced independence requirements aren’t always front of mind for every director. If I had a dime for every time one of my clients discovered a consulting agreement that had some sort of tie to an audit committee member…well, anyway:

In remarks yesterday, SEC Chief Accountant Wes Bricker called out independence of committee members as one of the main drivers of audit committee effectiveness – along with time, information quality and training & experience.

So yes, it’s still important to at least one influential person, even as we debate whether the overall trend of “supermajority” director independence is worthwhile. Wes also suggested that the auditor’s understanding of the company’s business & audit risks should be something the audit committee considers when evaluating their performance. And he implied that the idea of mandatory auditor rotation remains pretty dead in the US, despite some European regulators requiring it:

As relevant information for the audit committees’ oversight, I believe it is also essential for the committee members to familiarize themselves with relevant research evidence. For example, existing academic research has not been conclusive on the relationship between an auditor’s tenure and either audit quality or auditor independence. Some studies document that mandated rotation may worsen an auditor’s efforts to be skeptical and may mask company “opinion shopping.” There is also some evidence suggesting that professional skepticism can, in some cases, benefit from a long-term auditor-client relationship.

ESG Ratings: The Field Gets More Crowded

There’s some consensus that ESG ratings are impacting investment decisions – but it’s getting very difficult to keep up with all the offerings. S&P recently jumped into the mix with this “ESG Ratings Tool,” which allows companies to participate in the ratings process from start to finish. Assessments are conducted at the request of & in consultation with a company, and the company can then also decide whether & how to disclose the rating.

Meanwhile, State Street Global Advisors is fed up with the ESG ratings free-for-all and is now applying its own scoring system – “R-Factor.” This Davis Polk blog has the details:

An April 2019 SSGA article provides further insight into which resources SSGA is actually using to generate its R-Factor score for any company. For environmental and social scoring, R-Factor leverages the Sustainability Accounting Standards Board (or SASB) Materiality Map as the key framework for materiality.

SSGA writes that, “The R-Factor scoring model is powered by multiple best-in-class ESG data providers — Sustainalytics, Vigeo EIRIS, Institutional Shareholder Services (ISS) Governance and ISS Oekom — as well as SASB meta-data for categorizing and weighting.” SSGA uses another in-house proprietary tool for governance scoring that takes into account region- or country-specific norms. State Street has stated in other publications that it utilizes the Task Force on Climate-related Financial Disclosures Framework (known as TCFD) and that CDP’s (formally the Carbon Disclosure Project) Framework is another possibility.

Liz Dunshee