I blogged yesterday about the anticipated timing for the most high-profile rulemaking on the SEC’s Spring 2023 Reg Flex Agenda. I also did a quick side-by-side comparison against the Fall 2022 Reg Flex Agenda to see whether there was anything new on the proposed list and noticed one notable rule that wasn’t in the earlier agenda — but has been on the SEC’s radar for quite some time.
As it turns out, Dave’s blog from mid-March on Dodd-Frank Act stragglers was prophetic. He suggested that the recent reminder of what it’s like to have major bank failures may renew focus on an unfinished piece of Dodd-Frank rulemaking, and here it is in the Reg Flex Agenda, slotted for April 2024.
Dave was referring to Section 956 of the Dodd-Frank Act, which directs multiple regulators to jointly prescribe regulations or guidelines for incentive-based compensation practices at covered financial institutions (specific types that have $1 billion or more in assets) and specifically prohibit any types or features of incentive-based compensation arrangements that encourage inappropriate risks by a covered financial institution:
(1) by providing an executive officer, employee, director, or principal shareholder of the covered financial institution with excessive compensation, fees, or benefits; or
(2) that could lead to material financial loss to the covered financial institution.
Under Section 956, a covered financial institution also must disclose to its appropriate regulator the structure of its incentive-based compensation arrangements sufficient to determine whether the structure provides excessive compensation, fees, or benefits or could lead to material financial loss to the institution.
As you might expect (or remember?), the SEC and six other regulators jointly proposed rules twice in the past. Dave’s blog has more details on the history here to refresh your memory.
In a recent blog, Goodwin reminds us that, for calendar year-end companies, the new disclosure regarding director and officer trading plans and arrangements adopted, modified or terminated on or after April 1, 2023 is required in the Form 10-Q for the quarter ended June 30, 2023. Earlier this year, Goodwin published an updated version of its Form 10-Q Checklist, including the new requirements. The blog also notes that SRCs have a little more time:
SRCs must comply with Item 408(a) for adoptions, modifications or terminations that occur on or after October 1, 2023 and provide this disclosure beginning with the periodic report that covers the quarter ending December 31, 2023. SRCs that have a December 31 fiscal year end will first include this disclosure for the fourth fiscal quarter of 2023 in their Form 10-K report for the year ended December 31, 2023.
Speaking of SRCs, Goodwin highlighted that public float day is coming up for companies with a December 31 fiscal year-end, which can have immediate implications for companies that newly qualify for SRC status as of the end of the second quarter:
A company that qualifies as a SRC as of the measurement date can elect to use some or all of the SRC disclosure accommodations in its next Form 10-Q report (i.e., the Form 10-Q report for its second fiscal quarter). If it does so, the company must check the SRC box on the cover page of the report. Beginning with the Form 10-Q report for the first fiscal quarter of the following year, the company must check the SRC box, even if it does not rely on the SRC scaled disclosure accommodations.
Of course, June 30th is a key date for filer status generally for public companies with a calendar year-end, and you’ll want to know your filer status sooner rather than later if there’s a chance it could change for next year.
The May-June issue of “The Corporate Counsel” newsletter is in the mail. It’s also available online to members of TheCorporateCounsel.net who subscribe to the electronic format. This issue includes the following articles:
– SEC Adopts Amendments Requiring More Detailed Share Repurchase Disclosure
– What’s in a Name? Postponement, Adjournment and Recess of Stockholders’ Meetings
If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
Yesterday, the SEC’s Spring 2023 Reg Flex Agenda, which reflects the targeted timeframe for planned rulemaking, was released. Generally, it looks like the most significant, unfinished rulemaking previously targeted for April has been pushed out to October. Here are some highlights for rulemaking in the final rule stage:
Of course, these dates are aspirational and signify general timeframes versus precise dates. The Reg Flex Agenda can give insight into current (or, at least, as of April 10th) priorities of the Chair, but it isn’t a definitive guide for anyone trying to predict SEC rulemaking for purposes of specific board agendas, budget and workflow.
In mid-March, FASB issued an Exposure Draft to solicit public comment on proposed changes to ASU Topic 740: Income Taxes. Per FASB’s press release, comments were due May 30, 2023. As reported by CFO Dive, the proposal, which is the third time FASB has attempted to tackle this topic, would require more explicit accounting breakdowns of the taxes companies pay, and has elicited extensive feedback from companies and business and investor groups.
The comments ranged from something akin to “this is a non-starter” from the US Chamber of Commerce to investor groups stating that the new disclosures “fall short.” As a middle-of-the-road example, the comment letter from one corporate stakeholder urged FASB to provide companies sufficient time to comply since tax systems and controls will need to be updated. The FASB staff will now analyze the comments and present to the Board.
As Liz has blogged, “tax impact” has been growing as an ESG issue for a number of years, and tax transparency shareholder proposals are on the rise. So companies may be moving toward more tax disclosure whether or not FASB approves the proposed accounting standards update.
We’ve posted the transcript for our recent “Managing the New Buyback Disclosure Rules” webcast featuring Era Anagnosti of DLA Piper, Robert Evans of Locke Lord, Allison Handy of Perkins Coie, and Dave Lynn of Morrison Foerster and TheCorporateCounsel.net. Here’s an excerpt from Era Anagnosti’s comments on disclosure controls related to the new requirement to disclose the objectives or rationale of the repurchase program and the process or criteria for determining the amount of repurchases:
I also would focus on ensuring proper documentation for substantiating the objectives and the process used to determine the amount of repurchases. The board approves these repurchases, so it’s critical that in carrying out their fiduciary duties, the board’s process for determining these criteria and establishing the repurchase program is sound from a risk and liability perspective, considering the new disclosure requirements put a spotlight on this process.
We had several clients raise questions around, “What about existing repurchase programs that may still be effective by the time the rules go live?” Go back to look at what the board articulated as an objective and criteria at the time. That may not necessarily be up to par with a new disclosure requirement. It’s important for the board to reassess the objective and criteria of previously approved plans.
If you are not a member of TheCorporateCounsel.net, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
Last week, the SEC announced settled charges against a company and two of its former officers related to revenue recognition practices that caused the company to file materially misstated financial statements. Here’s an excerpt from the administrative summary:
According to the SEC’s order, under which USAT neither admitted nor denied the SEC’s findings, USAT attempted to maximize end-of-quarter revenue and meet its internal sales targets in two ways. First, they entered into purported bill-and-hold sales transactions that did not conform to the relevant accounting standards at the time of the transactions or the company’s publicly-stated sales and revenue recognition policies. Second, they inflated quarterly sales revenue by deliberately shipping devices to its customers that the customers had not ordered or explicitly told USAT they did not want in the face of inventory shortfalls.
With respect to the bill-and-hold practice, the order explains that, on two occasions during the period in question, the company billed customers for payment (even though it didn’t expect to collect until after delivery), held the related devices for future delivery (even if it had them in stock) and treated these purported sales as a bill-and-hold transaction. But these transactions didn’t actually meet the criteria to recognize revenue from a bill-and-hold transaction — in that the company initiated the bill-and-hold treatment, there was no fixed commitment to purchase, and the transactions lacked a fixed delivery date — plus the company didn’t disclose its use of such transactions.
With respect to shipping the wrong inventory, the company lacked inventory to fulfill customer orders for one device and allegedly engaged in various shenanigans involving shipping another device to meet sales goals for the quarter — including sending the unwanted device and allowing future exchanges, shipping the unwanted devices to a third party when a customer wouldn’t accept the delivery and shipping the wrong devices and blaming “shipping mistakes.” In each case, the company knew the devices would be returned when the correct product became available and shouldn’t have recognized revenue at the time of shipment. Eventually, the issues were identified and the company restated past financials.
While this enforcement action may be more a case of alleged wrongdoing than a trap for the unwary, these types of accounting fraud proceedings are a good reminder of the topics that continue to top the list of focus areas for the Enforcement Division.
The D&O Diary recently shared a guest post from Ed Whitworth and Yera Patel of Inigo summarizing the results of a recent survey they conducted of securities defense counsel. The full summary is worth a read, but here are some of the top takeaways:
– Derivative settlements are continuing to increase in severity. The Caremark standard is holding but continues to be eroded in places. Derivative cases are an increasingly attractive option for the Plaintiff Bar.
– SEC investigations are going formal much earlier and naming individuals at the outset. These cases are therefore becoming much more expensive to defend.
The report also includes some predictions for 2023, which Ingio will assess next year once the data is available:
– Dismissal rates will fall by at least 5% in 2023 relative to the average for the past 10 years.
– Securities class action filing rates will be higher in 2023 than in both 2022 and 2021.
– There will be at least five derivative settlements of more than $100m each in 2023.
– Bankruptcy filings will increase, leading to more breach of fiduciary duty and fraudulent transfer claims.
– SEC investigations will be a major exposure for companies and insurers over the next 24 months.
Tune in at 2 pm Eastern today for the webcast “Pay Vs. Performance: Lessons From Season 1” to hear Weil’s Howard Dicker, Freshfields’ Nicole Foster, Aon’s Daniel Kapinos, and Mercer’s Carol Silverman discuss how companies approached pay-versus-performance disclosures in year one. This webcast will cover:
– Challenges in the first year and approaches to interpretive questions
– Common mistakes and misconceptions
– Most frequently used company-selected measures
– Trends in the tabular list and relationship disclosures
– Use and placement of supplemental disclosures
– Recommendations for shareholder engagements and voting impact
– Longer term impacts on compensation programs & disclosures
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program. All credits are pending state approval.
Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Email sales@ccrcorp.com – or call us at 800.737.1271.
There’s been a lot of chatter recently about using ephemeral messaging and off-channel communications. This topic got a lot of air time from SEC Staff members and other panelists at Securities Enforcement Forum West 2023, with the acronym “BYOD” (D for device) repeatedly used throughout the day, highlighting that some companies are rethinking BYOD policies. If this is news to you, this Holland & Knight blog reviews recordkeeping requirements that apply to broker-dealers and investment advisers and recent, related SEC and DOJ actions. Then, the blog goes on to say this:
But what about public company issuers? Currently, under the federal securities laws, issuers are not subject to direct regulations on preservation of business communications. However, much like investment advisers, these types of communications may need to be retained by public companies if they satisfy another statutory recordkeeping obligation. For example, under Exchange Act Section 13(b)(2)(A), issuers are required to make and keep certain books and records that accurately and fairly reflect the transactions and dispositions of the assets of the issuer. But the scope of messages that issuers need to consider retaining may have increased exponentially. As detailed further below, recent DOJ guidance has brought these issues to their compliance doorstep as well.
This new DOJ guidance is from earlier this year. The DOJ expects all companies — not just regulated entities — to maintain and enforce policies to ensure that business-related (note how broad this is) electronic data and communications are preserved and can be accessed. During a DOJ inquiry, it will scrutinize a company’s policy environment and risk management framework around device use and message retention. This means that using certain platforms for electronic communication creates some compliance risks. In light of this guidance, here are some suggestions from the blog for all companies to consider:
– reviewing relevant document retention and other policies to ensure electronic communications are preserved, particularly when there is a threat of litigation or a government investigation
– assessing compliance policies concerning supervisory responsibilities of managers to subordinates
– the implications of a bring your own device (BYOD) policy – whereby employees are allowed to utilize their own devices for company purposes – as such policies are increasingly becoming an early discussion point between defense counsel and government attorneys on the scope of documents under company control
– written personnel certifications that they are complying with preservation and record retention requirements
– implementing, as appropriate, technological restrictions and surveillance programs – and regularly audit them – to ensure compliance with ongoing preservation obligations
– corrective action and employee discipline matrices to address instances of non-compliance
For more information, we’re posting related memos in our “Records Retention” Practice Area.