Yesterday, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the Holding Foreign Companies Accountable Act. These rules apply to issuers that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate (referred to as “Commission-Identified Issuers”).
Consistent with the Holding Foreign Companies Accountable Act, the amendments require Commission-Identified Issuers to submit documentation to the SEC through the EDGAR system on or before its annual report due date that establishes that it is not owned or controlled by a governmental entity in its public accounting firm’s foreign jurisdiction. The amendments also require an Commission-Identified Issuer that is also a “foreign issuer,” as defined in Exchange Act Rule 3b-4, to provide certain additional specified disclosures in their annual report for itself and its consolidated foreign operating entity or entities, including any variable-interest entity or similar structure that results in additional foreign entities being consolidated in the registrant’s financial statements. The required disclosures include:
During the period covered by the form, the registered public accounting firm has prepared an audit report for the issuer;
The percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organized;
Whether governmental entities in the applicable foreign jurisdiction with respect to that registered public accounting firm have a controlling financial interest with respect to the issuer;
The name of each official of the Chinese Communist Party who is a member of the board of directors of the issuer or the operating entity with respect to the issuer; and
Whether the articles of incorporation of the issuer (or equivalent organizing document) contains any charter of the Chinese Communist Party, including the text of any such charter.
The SEC will identify an issuer as a Commission-Identified Issuer as early as possible after the issuer files its annual report and on a rolling basis. The SEC will “provisionally identify” an issuer as a Commission-Identified Issuer on the SEC’s website at www.sec.gov/HFCAA. For 15 business days after this provisional identification, an issuer may email the SEC if it believes it has been incorrectly identified, providing evidence supporting its claim. After reviewing the information, the issuer will be notified whether the SEC will “conclusively identify” the registrant as a Commission-Identified Issuer. If the issuer does not contact the SEC to dispute the provisional identification within 15 business days, the SEC will conclusively identify the issuer as a Commission-Identified Issuer. The SEC will publish a list on its website identifying Commission-Identified Issuers, indicating the number of years a Commission-Identified Issuer has been published on the list, and noting whether the Commission-Identified Issuer has been subject to any prior trading prohibitions.
The SEC will impose an initial trading prohibition on an issuer as soon as practicable after it is conclusively identified as a Commission-Identified Issuer for three consecutive years. If the SEC ends the initial trading prohibition and, thereafter, the issuer is again determined to be a Commission-Identified Issuer, the SEC will impose a subsequent trading prohibition on the issuer for a minimum of five years. To end an initial or subsequent trading prohibition, a Commission-Identified Issuer must certify that it has retained or will retain a registered public accounting firm that the PCAOB has determined it is able to inspect or investigate. To make that certification, the Commission-Identified Issuer must file financial statements that include an audit report signed by such a registered public accounting firm.
Believe it or not, disclosure committee practices are always a hot topic. Clients often ask what other companies are doing in their disclosure committees, and it is often hard to benchmark disclosure committee practices because companies are not required to disclose those practices or post their disclosure committee charter. That is why I was pleased to see the recent report, Disclosure committee report: practices and trends, which was released last month and completed jointly by EY, the Society for Corporate Governance, and the Financial Education & Research Foundation, which is the independent nonprofit research affiliate of Financial Executives International. This report is an update to a previous report from 2014, Unlocking the potential of disclosure committees: leading practices and trends.
Key findings from the report include:
Formal disclosure committees are a corporate norm, with nearly all respondents indicating they have one in place.
Staffing of committees is fairly consistent, with members generally being appointed by senior executives.
Written disclosure committee protocols, such as charters, reporting and minutes, have become more prevalent.
Member roles are diverse, spanning, on average, more than 10 different job functions.
Most disclosure committees meet at least quarterly and approximately 60% maintain formal minutes.
Approximately one-third of disclosure committee representatives regularly report to audit committees.
Disclosure committees may have subcommittees and multilayered structures.
While disclosure committees’ focus continues to be primarily on SEC financial reporting and related disclosures, many also review other types of documents, such as proxy statements, sustainability reports and website content.
Overall, the findings in the report highlight common and trending practices regarding disclosure committees’ structure, composition and activities, and the report offers further insight into how companies have been using their disclosure committees to address disclosure requirements and facilitate more effective disclosures.
I am always the first to admit that I am not an M&A guy. I recall working on my one and only M&A assignment when I was an associate, and I am pretty sure that I barely made it through that deal. I still feel bad for the attorney who had to supervise me on that one. But you don’t have to be an M&A person to know that we are in a whole new world when it comes to antitrust merger reviews and enforcement. While we talk a lot about how the environment has significantly changed at the SEC over the past year, the extent to which the pendulum has swung on the antitrust front is next level stuff.
That is why you should definitely join us on DealLawyers.com next Tuesday, December 7th at 2:00pm EST for the webcast “The Brave New World of Antitrust Merger Review & Enforcement.” In this brave new world, merger review and enforcement decisions will affect our clients and companies, so it is important to understand where things are going – even if you are not an M&A person!
If you do not have a subscription to access all of the great resources on DealLawyers.com like this webcast, email sales@ccrcorp.com today.
For those that have been doing this long enough to recall the dark days of the options backdating scandal back in the 2000s, you may also recall that a variety of other equity award granting practices were in the spotlight back in those days, including “spring loading” and “bullet dodging.” Spring loading occurs when a company issues stock options shortly before the release of information that it expects to cause an increase in its stock price, while bullet dodging occurs when a company delays its option awards until after the release of information that it expects to cause a decrease in its stock price.
As Emily notes in the Advisors’ Blog on CompensationStandards.com, after all of these years, the SEC Staff has issued guidance on the proper accounting when an issuer is “spring loading” an option grant. As stated in the SEC’s press release, new Staff Accounting Bulletin No. 120 says that companies estimating the fair value of spring-loaded awards in accordance with ASC Topic 718 “must consider the impact that the material nonpublic information will have upon release.” Here are the main changes that Staff Accounting Bulletin No. 120 makes:
Amends and replaces the interpretive guidance in Topic 14.D., Certain Assumptions Used in
Valuation Methods. SAB No. 120 states that when companies are granting share-based awards while in possession of MNPI, companies should consider “whether adjustments to the current price of the underlying share or the expected volatility of the price of the underlying share for the expected term of the share-based payment award are appropriate when applying a fair-value-based measurement method to estimate the cost of its share-based payment transactions.”
Rescinds guidance in Subtopic 14.A., Share-Based Payment Transactions with Nonemployees, noting that ASU 2018-07 made Subtopic 14.A. no longer relevant.
Edits to the following subtopics to conform to updated GAAP terminology from FASB’s ASC Topic 718 (as updated by FASB’s Accounting Standards Updates): Subtopics 14.B., Transition from Nonpublic to Public Entity Status; 14.C., Valuation Methods; 14.D., Certain Assumptions Used in Valuation Methods; 14.E., FASB ASC Topic 718, Compensation – Stock Compensation, and Certain Redeemable Financial Instruments; 14.F., Classification of Compensation Expense Associated with Share-Based Payment Arrangements; 14.I., Capitalization of Compensation Cost Related to Share-Based Payment Arrangements; and 5.T., Accounting for Expenses or Liabilities Paid by Principal Stockholder(s).
As this Law360 article notes, SEC Chair Gary Gensler appeared with former SEC Chair Jay Clayton at the Digital Asset Compliance & Market Integrity Summit yesterday, and they expressed a rare meeting of minds when it comes to regulating digital assets. When Gensler called for crypto firms to come within the SEC’s current registration framework, Clayton stated “we’re very much of the same mind on this, ask what is the form and function that’s being provided, what is the product, and map that to the traditional model space, and look to that for the type of regulation that applies.” The article goes on to note:
“While acknowledging the potential for blockchain technology to transform the modern financial system, both Gensler and Clayton were dubious of the notion that the decentralized quality of certain DeFi products and platforms, or indeed just their being labeled as “decentralized,” excused those products from the SEC’s reach.”
During Clayton’s tenure at the SEC, the ICO boom reached a fevered pitch, and the SEC took a number of steps toward trying to regulate the sale of tokens that were “investment contracts” under the Howey test, such as through the The DAO Section 21(a) Report, numerous Staff statements on the applicability of the federal securities laws to token offerings, no-action letters and a variety of Enforcement actions.
In the latest Deep Dive with Dave Podcast, Brinkley Dickerson from Troutman Pepper joins me for an MD&A Workshop. With the SEC’s significant changes to MD&A now in effect for this reporting season, it is a great time to get a handle on how to tackle those changes and improve the overall quality of your MD&A.
Liz recently blogged about EY’s 10th annual survey of audit committee disclosures, and now the Center for Audit Quality is out with its 8th annual Audit Committee Transparency Barometer. All of this tracking of audit committee disclosures is indicative of the fact that the audit committee’s role in oversight of financial reporting and the auditors is still very much of interest to investors, including disclosure that goes above and beyond the bare minimum required by the SEC.
CAQ’s analysis focused on disclosures of audit committee oversight in proxy statements of companies in the S&P Composite 1500. Overall, the CAQ observed slight increases with some stagnation among disclosures that have been tracked over the years. The one big exception is cybersecurity – the CAQ indicates that disclosure regarding the audit committee’s oversight of cybersecurity increased by 5 to 7 percentage points among S&P 500 companies each year since 2016.
The most common disclosures that CAQ observed in 2021 continue to be related to non-audit services and potential impact to independence, auditor tenure, criteria considered to evaluate the audit firm and involvement in audit partner selection. Moderate levels of disclosure were observed on the topics of oversight of cybersecurity, engagement partner rotation, considerations when appointing the auditor, and stating the evaluation of the auditor occurs at least annually. The lowest rates of disclosure involve the audit committee’s negotiation of auditor fees, an explanation of changes in auditor fees, consideration of fees in the context of audit quality and disclosure of significant areas addressed with the auditor. The CAQ indicates that these areas present the greatest opportunity for increased transparency by the audit committee.
The SEC’s Investor Advisory Committee is set to meet tomorrow, and on the agenda is a deep dive into digital assets. The agenda notes:
The panel will explore the intersection of digital assets and investor protection, with a specific lens on the regulatory framework covering digital assets, market structure issues, and defining risk in emerging technologies. Additional covered topics include blockchain technologies, crypto-based EFTs, and stablecoins.
In the afternoon, the Investor Advisory Committee plans to address the SEC’s potential role in addressing elder financial abuse issues.