As part of the SEC’s recent share repurchase disclosure amendments, it implemented a new Form F-SR, which foreign private issuers must use to provide the required quarterly tabular disclosure about their buyback activity. Yesterday, Corp Fin issued three new Exchange Act Forms CDIs on issues relating to the new form:
Question 113.01: Is a Form F-SR required to be filed if, during the covered fiscal quarter, the foreign private issuer or affiliated purchaser did not repurchase any of its equity securities registered under Exchange Act Section 12?
Answer: No, a Form F-SR is not required to be filed under these circumstances. Note, however, there is no de minimis exception to the Form F-SR filing requirement; even the repurchase of a very small number of equity securities would trigger a Form F-SR filing. [August 30, 2023]
Question 113.02: A foreign private issuer or affiliated purchaser did not conduct any repurchases that would trigger the requirement to file a Form F-SR. Is a Form F-SR nevertheless required solely to check the box under “Registrant Purchases of Equity Securities” section of Form F-SR for the covered purchases or sales of securities by a director or member of senior management who would be identified pursuant to Item 1 of Form 20-F?
Answer: No. [August 30, 2023]
Question 113.03: Is a Form F-SR required to be filed for the final quarter of the fiscal year?
Answer: Yes, if a foreign private issuer or affiliated purchaser engaged in repurchases during the final quarter of the fiscal year, then a Form F-SR would be required for that final quarter and must be filed within 45 days after the end of the quarter. Foreign private issuers are not permitted to wait to report the repurchases during the final quarter of the fiscal year in the Form 20-F for that fiscal year. See Exchange Act Release No. 34-97424 (May 3, 2023) at fn. 185. [August 30, 2023]
Corp Fin also issued a new Regulation AB CDI. The CDI relates to when documents and agreements must be filed to be considered timely for purposes of Form SF-3 eligibility. If the Reg AB CDI is helpful to you or means anything to you at all, well – you’re welcome! Even though I was once named “Ohio Securitization Lawyer of the Year” by what seemed to be a very sketchy (or at least a very confused) British lawyer rating service, I never did an asset-backed deal in my entire career, so this stuff isn’t exactly in my wheelhouse.
A few months ago, Dave blogged about Kirschner v. JPMorgan Chase Bank, N.A., a potentially significant case pending before the Second Circuit which presented the issue of whether syndicated loans were “securities” for purposes of the Securities Act. The SDNY previously held that they were not, and last week, the Second Circuit affirmed that decision. This excerpt from Debevoise’s memo on the case said that the Supreme Court’s decision in Reves v. Ernst & Young featured prominently in the Court’s reasoning:
In affirming the district court’s decision, the Second Circuit’s analysis focused on the Reves test. The court found that three factors—the plan of distribution, the reasonable expectations of the public and the existence of other risk-reducing factors—favored a conclusion that the term loan should not be classified as a security. The court found that only one factor, the investment-focused motivation of the sophisticated parties to whom the term loan was syndicated, favored classifying the term loan as a security. However, the court determined this motivation was outweighed by the other three Reves factor.
This is a case that attracted a lot of attention because as Dave said in his earlier blog, concluding that syndicated loans involved the issuance of securities could’ve really upended the $2.5 trillion market for those loans. A coalition of business groups that included the U.S. Chamber of Commerce and SIFMA filed an amicus brief in support of the position that syndicated loans weren’t securities. Interestingly, the SEC chose to sit this one out. In July, the agency said that it would not file an amicus brief in the case.
One of my “go to” resources for quickly referencing independence and other requirements applicable to public company directors has long been Weil’s chart on those requirements. I was pleased to learn that the firm has just issued an updated version of that chart which we’ve posted in our “IPOs” Practice Area. Check it out – it covers NYSE & Nasdaq listing standards for boards and committees, as well as SEC disclosure requirements relating to directors.
Liz recently blogged about some of the notable comment letters that were submitted to the PCAOB on its “NOCLAR” proposal. We can now add the ABA’s Business Law Section to that list of commenters. This excerpt from its comment letter highlights a number of concerns that the Business Law Section has about the implications of the proposal:
[W]e are concerned about the scope and impact of the Proposed Standards, which effectively would impose an affirmative obligation on auditors to detect and evaluate all noncompliance by an audit client with law and regulations that may have a direct or indirect effect on the financial statements, even where untethered to existing accounting standards.
Among other concerns, the Proposed Standards (i) place an unworkable responsibility upon accountants to make subjective assessments of often complex and uncertain legal matters, the probability of future events, and the potential impact of those events, all of which are outside the scope of auditors’ typical responsibilities, (ii) endanger the confidentiality and protections of client communications that are foundational components of the lawyer-client relationship and our legal system and which are designed to promote legal compliance, (iii) risk diluting the audit function that is at the core of ensuring the integrity of financial reporting, (iv) would disrupt the separate roles played by the legal and accounting professions that benefit clients, and (v) would do the foregoing by adding costs to the audit process that will far outweigh any limited and speculative perceived benefits.
The comment letter contrasts the proposal with the existing auditing standard and the requirements of Section 10A of the Exchange Act, and says that those standards “take a balanced approach” that addresses the need to ensure and enhance a public company’s compliance with applicable laws and regulations by imposing obligations on auditors when they become aware of illegal acts.
The letter argues that the existing requirement that auditors not ignore “red flags” that come to their attention is very different from the NOCLAR proposal, which would effectively require auditors to conduct a legal audit of a company’s compliance with laws and regulations.
Earlier this month, I blogged about a recent 3d Cir. decision holding that a company could be liable for the paraphrased comments of its CEO that appeared in an analyst report. This Bryan Cave blog also discusses that case and offers up some thoughts on recommended practices for communications with analysts. Here’s an excerpt:
Care should be exercised in dealing with analysts to avoid entanglement or inadvertently disclosing MNPI.
– Consider having an FD-trained official accompany officers meeting with analysts to monitor and assist with debriefings and, when advisable, devising FD remedial steps.
– Consider maintaining logs of contacts or phone calls and contemporaneously documenting the substance of any one-on-one discussions.
– Avoid commenting on analyst reports or earnings models, except for corrections of factual misstatements consistent with publicly available historical or factual information or to correct mathematical errors.
Maintain a written record of comments, and include a disclaimer approved by legal counsel but recognize that it may not provide complete protection, depending on the facts and circumstances.
– No other feedback or guidance on analyst reports or earnings models, including as to analyst forecasts or projections, should be communicated.
– Avoid commenting on or confirming earnings expectations, except during an approved short window following, and consistent with, prior broadly noticed and disseminated guidance, such as during an earnings call, and after consultation with legal counsel.
Other recommendations include the need to review internal reports and communications in order to ensure consistency with public disclosures, the importance of using scripts and avoiding informal comments, and the need to limit review of analysts’ reports to factual matters. Most of these recommendations aren’t new – but all of them are worth taking to heart.
Join us tomorrow at 2 pm eastern for the webcast – “Corporate DEI Programs After Students for Fair Admissions v. Harvard” – to hear Orrick’s J.T. Ho, NextRoll’s Travis Sumter and PracticalESG.com’s Ngozi Okeh discuss the implications of the Supreme Court’s recent decision to end affirmative action in higher education on corporate DEI programs.
This is a joint webcast with PracticalESG.com and members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE who require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval, typically within 30 days of the webcast. All credits are pending state approval.
Last Friday, SEC Chief Accountant Paul Munter issued a statement cautioning management and auditors against taking a narrow approach in their risk assessments when evaluating the effectiveness of a company’s internal controls. The statement also outlines the OCA Staff’s expectations of management & auditors in the risk assessment process.
The statement says that management must “take a holistic approach when assessing information about the business and avoid the potential bias toward evaluating problems as isolated incidents, in order to timely identify risks, including entity-level risks”. It must then design processes & controls that are responsive to those risks and effectively identify information that they are required to communicate to investors. This excerpt provides some additional insight into the broader approach the Staff expects from management in its risk assessment process:
Changing economic conditions may have a significant and sudden impact on an issuer’s business, which could change risks or create new ones. Therefore, to be effective, risk assessment processes must comprehensively and continually consider issuers’ objectives, strategies, and related business risks; evaluate contradictory information; and deploy appropriate management resources to respond to those risks. For example, management’s risk assessment process may consider observations from regulators, analyst reports, and short-seller reports. Management is also required to provide auditors complete information related to certain communications from regulatory agencies.
Management needs to be alert to new or changing business risks to identify changes that could significantly impact its system of internal control, and design and implement responses that support issuers’ ability to appropriately disclose information in its periodic filings. Business risks, such as a company’s loss of financing, customer concentrations, or declining conditions affecting the company’s industry, could affect issuers’ ability to settle their obligations when due, and affect the risks of material misstatements in financial statements not being identified on a timely basis. Likewise, risks related to changes in technology could impact the effectiveness of controls around processing of transactions.
The statement goes on to provide additional guidance on the Staff’s expectations concerning entity-level controls and what is required of public companies when it comes to their reporting obligations with respect to internal controls. The statement also admonishes auditors about the need for professional skepticism when it comes to risk assessment, noting that they should be alert to potential changes in the company’s “objectives, strategies and business risks” and their implications for the control environment. In particular, the statement notes that auditors should “consider the possible impact of an issuer’s public statements regarding changes in their strategy, board composition, or other governance matters—and whether such statements contradict management’s assessment of its control environment.”
Companies would be well advised to share the Chief Accountant’s statement and discuss its implications with their audit committees. It’s pretty clear from the statement’s tone that the OCA Staff has concerns about the risk assessment process and the conclusions and disclosures about ICFR that flow from that process. It seems likely that these concerns are going to find their way into Staff comment letters and, potentially, enforcement proceedings as well.
Last week, in New England Carpenters v. DeCarlo, (2d. Cir., 8/23), the Second Circuit held that CEO & CFO certifications in Exchange Act filings were statements of opinion, and that securities fraud claims premised on those statements had to satisfy the Omnicare pleading standard in order to be actionable. This Proskauer blog summarizes the Court’s reasoning on this aspect of the decision:
The court held that the certifications “signal that they are opinions by stating that they are ‘based on [the] knowledge’ of the officer,” and “there is no allegation that the opinion is actionable on the ground that it was not based on the officer’s knowledge.” The court rejected plaintiffs’ contention that the officers had known that the financial reports were false, misleading, or noncompliant with GAAP; it also held that plaintiffs had not pled facts establishing “a lack of meaningful inquiry, other than the fact that the certification turned out to be wrong.” Nor did AmTrust’s change of its accounting opinion (through the restatement) “mean that the original certified opinions were disingenuous.”
While the blog says that the decision is good news for signers of Sarbanes-Oxley certifications since it makes it clear that the Court views them as expressions of opinion, it cautions that the opinion defense will not be available if the signer knew that the certification was incorrect.
The July-August issue of “The Corporate Counsel” newsletter is in the mail. It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue is devoted to a discussion of the SEC’s adoption of its long-anticipated cybersecurity disclosure requirements. If you’re not already a subscriber, you can subscribe online to this essential resource or email sales @ccrcorp.com.
Cybersecurity disclosures are also on the agenda for our upcoming Proxy Disclosure and 20th Annual Executive Compensation Conferences. WilmerHale’s Lily Brown, Cooley’s Brad Goldberg, Hogan Lovells’ Paul Otto and Wilson Sonsini’s Amanda Urquiza will address key action items for cybersecurity risk disclosures. With most companies facing a mid-December 2023 compliance date for these new disclosure requirements, you don’t want to miss out on the insights of our panel of experts! Register today for these conferences & our 2nd Annual Practical ESG Conference.
Last year’s Rule 10b5-1 amendments & new disclosure requirements have prompted a lot of interpretive issues. Corp Fin issued three CDIs back in May addressing some of those issues, and on Friday, Corp Fin issued five more CDIs covering amended Rule 10b5-1 and the insider trading plan disclosure requirements contained in Item 408(a) of Reg S-K. The text of each new CDI is set forth below.
Exchange Act Rules – The three new Exchange Act Rules CDIs address issues relating to the required cooling-off period for new 10b5-1 plans, the prohibition on multiple overlapping plans, and the Form 4 checkbox requirement.
Question 120.29: Under Rule 10b5-1(c)(1)(ii)(B)(1), the required cooling-off period for directors and officers subject to Exchange Act Section 16 reporting is the later of 90 days after the adoption of the contract, instruction, or plan or “[t]wo business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted.” Does the filing date count as the first business day for the purposes of the Rule 10b5-1(c)(1)(ii)(B)(1) required cooling-off period?
Answer: No. For purposes of the cooling-off period specified in Rule 10b5-1(c)(1)(ii)(B)(1), the date of disclosure of the issuer’s financial results is the filing date of the relevant Form 10-Q or Form 10-K, and the first business day would be the next business day that follows the filing date. To determine the filing date of the relevant form, refer to Rule 13(a)(2) of Regulation S-T. For example, if the relevant form is filed on a Monday, trading may commence under the contract, instruction, or plan on Thursday (assuming no intervening Federal holidays). In addition, whether a form is filed before or after trading opens on a given day has no bearing on the calculation. [August 25, 2023]
Question 120.30: Under a 401(k) plan, an issuer advances cash to the plan administrator who purchases stock in the open market to make matching grants of the issuer’s common stock to plan participants. If a participant relies on Rule 10b5-1 to participate in the 401(k) plan, would the Rule 10b5-1 affirmative defense be available to the participant for a concurrent plan for purchases or sales on the open market?
Answer: Yes. Even though participants elect how much to contribute to their individual 401(k) accounts, an open-market transaction conducted at the direction of the plan administrator, and not at the direction of the plan participant, to match a contribution by the participant with employer stock would not be an overlapping plan for purposes of Rule 10b5-1(c)(1)(ii)(D) that would disqualify a plan participant’s reliance on Rule 10b5-1 for a concurrent open market trading plan. [August 25, 2023]
Question 120.31: Does the Rule 10b5-1(c) check box on Form 4 for securities transactions made pursuant to a Rule 10b5-1 trading plan apply to trading plans that were adopted prior to the effective date of the amendments to Rule 10b5-1?
Answer: No. The Rule 10b5-1 check box on Form 4 applies to transactions that are made pursuant to a contract, instruction, or written plan for the purchase or sale of equity securities of the issuer that is intended to satisfy the affirmative defense conditions of amended Rule 10b5-1(c). See Release No. 33-11138 (Dec. 14, 2022). [August 25, 2023]
Question 120.31 of the Exchange Act Rules CDIs also appears as a new Question 135.04 in the Section 16 and Related Rules and Forms CDIs.
Regulation S-K – The two new Reg S-K CDIs address whether plan expirations are subject to disclosure under Item 408(a) and clarifies that any trading plan covering securities in which a director or officer has a pecuniary interest must be disclosed under Item 408(a).
Question 133A.01: Under Item 408(a)(1) of Regulation S-K, does the requirement to disclose plan terminations require disclosure of a plan that ends due to its expiration or completion (e.g., the plan ends by its terms and without any action by an individual)?
Answer: Disclosure regarding termination of a plan is not required for a plan that ends due to its expiration or completion. [August 25, 2023]
Question 133A.02: Item 408(a) of Regulation S-K requires disclosure of whether “any director or officer (as defined in § 240.16a–1(f) of this chapter)” adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fiscal quarter. Does this disclosure requirement apply to any such trading arrangement covering securities in which a director or officer has a pecuniary interest?
Answer: Item 408(a) applies to any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement covering securities in which an officer or director has a direct or indirect pecuniary interest that is reportable under Section 16 that the officer or director has made the decision to adopt or terminate. [August 25, 2023]