This recent blog from Barnes & Thornburgh’s Jay Knight has the skinny on some informal guidance from SEC Staff members who participated in AICPA and ABA conferences last week concerning how companies should decide whether they need to check the new Form 10-K checkbox. Based on the statements made by Staff members & Jay’s subsequent conversations with them, he identifies a two-step process that companies should engage in to make the decision:
Step 1: Were there any revisions made to the “previously issued financial statements”? For example, with respect to a 10-K for FY23, “previously issued financial statements” would be the 2021 and 2022 periods (for most issuers). This would cover ANY revisions to those previously issued financials (e.g., “Big R,” “little r,” as well as any others (such as a $2 error)).
If NO revisions were made to those previously issued financials ➔ the analysis stops and the box is NOT checked.
If YES ➔ move to step 2
Step 2: Were the revisions made to the previously issued financial statements the result of accounting errors under ASC 250? Importantly, not all revisions are because of accounting errors. Examples of a revision that is not an accounting error is the adoption of a new accounting principle that is pushed back into prior periods. Examples of revisions that are an accounting error are 1) corrections of mistakes in the application of US GAAP and 2) corrections of mathematical mistakes.
While we’re on the topic of whether or not to check the box, here’s another scenario to keep in mind: Would a company that restated interim results in Form 10-Q/A filings be required to check the new box on the Form 10-K cover page? As Meredith blogged back in September, the Staff informally advised that if financial statements included in the 10-K are not required to disclose the correction of an error because the error only existed in interim periods, it would not object to an issuer’s decision not to check the box on the Form 10-K.
In the most shocking discovery since Claude Rains learned that gambling was going on in Humphrey Bogart’s cafe in Casablanca, the WSJ recently reported that there are a whole bunch of stocks trading on Nasdaq that are currently trading below the $1 delisting threshold. Concerned investors are. . . well . . . concerned:
Companies with a share price below $1 can stay listed more than a year before Nasdaq kicks them off. Largely owing to the pileup of stocks below $1, around one in six Nasdaq-listed companies is running afoul of the exchange’s rules, Nasdaq data show.
“Exchanges are supposed to be gatekeepers and list only bona fide companies that have investor interest,” said Rick Fleming, a former SEC investor advocate. “If a bunch of companies aren’t really meeting those standards, it undermines the seal of approval that the exchanges are supposed to be imparting.”
Well, yeah, but Nasdaq and the NYSE are in the listing business, not the delisting business, so it isn’t surprising or even remotely scandalous that after they begin the delisting process, they give companies some time to come into compliance with the minimum listing standards. Not surprisingly, the WSJ says that most of the companies that find themselves in this boat are the product of the SPAC craze – which seems to me to be a better target for investor ire than the delisting process.
The SEC’s cyber disclosure rules mandating Form 8-K disclosure of material cybersecurity incidents go into effect on December 18th. New Item 1.05 of Form 8-K allows companies to defer disclosure for a time if the Attorney General determines that immediate disclosure would pose a substantial risk to national security or public safety and notifies the SEC of such determination in writing. The rules don’t specify how companies are supposed to bring this issue to the Attorney General’s attention, but the FBI has recently weighed in with guidance to public companies on how to do that.
The guidance provides that written notice be delivered to the FBI or another appropriate agency through a dedicated email address that will be established soon, and says that the notice must address the following questions:
1. What is the name of your company?
2. When did the cyber incident occur?
3. When did you determine the cyber incident is material, per 88 Fed. Reg. 51896? Include the date, time, and time zone. (Note: Failure to report this information immediately upon determination will cause your delay-referral request to be denied.)
4. Are you already in contact with the FBI or another U.S. government agency regarding this incident? If so, provide the names and field offices of the FBI points of contact or information regarding the U.S. government agency with whom you’re in contact.
5. Describe the incident in detail. Include the following details, at minimum:
a. What type of incident occurred?
b. What are the known or suspected intrusion vectors, including any identified vulnerabilities if known?
c. What infrastructure or data were affected (if any) and how were they affected?
d. What is the operational impact on the company, if known?
6. Is there confirmed or suspected attribution of the cyber actors responsible?
7. What is the current status of any remediation or mitigation efforts?
8. Where did the incident occur? Provide the street address, city, and state where the incident occurred.
9. Who are your company’s points of contact for this matter? Provide the name, phone number, and email address of personnel you want the FBI to contact to discuss this request.
10. Has your company previously submitted a delay referral request or is this the first time? If you have previously submitted a delay request, please include details about when DOJ made its last delay determination(s), on what grounds, and for how long it granted the delay (if applicable).
In an announcement accompanying the guidance, the FBI urges all public companies to establish a relationship with the cyber squad at their local FBI office. The FBI also “strongly encourages” companies to contact it directly or through the Secret Service, CISA, or another sector risk management agency soon after it believes disclosure of a newly discovered incident may pose a substantial risk to national security or public safety. The FBI says that this early outreach will enable it to familiarize itself with the relevant facts & circumstances before a materiality determination is made by the company.
I’m sure that it isn’t news to any of our readers that this year’s SEC rulemaking, enforcement actions and legislative, judicial, and regulatory developments have created a lot of new requirements and risks for public companies to consider as the new year approaches. This recent Sidley memo offers a dozen recommended action items for public companies to consider for 2024 in light of those developments. Here’s an excerpt with several of those recommendations:
– Proactively prepare for shareholder activism; confirm there are no illegal director interlocks. Particularly given the current universal proxy rules, companies are well advised to review director biographies in proxy statements and on corporate websites to ensure they reflect the strengths, qualifications, and relevant experience of individual directors. Before any activist situation arises, companies should also assess their vulnerabilities and ask experienced proxy contest counsel to review their corporate bylaws to ensure that they reflect current best practices. See the Sidley article here. Companies should also confirm that they have no interlocking directorates in violation of the Clayton Act – enforcement by the Federal Trade Commission and the Department of Justice resulted in more than a dozen director resignations in 2023, as discussed in the Sidley article here.
– Ensure that the board understands the impact of artificial intelligence (AI) on corporate strategy and risk. Corporate boards need to understand and stay apprised of AI-related legislative and regulatory initiatives in the U.S. and abroad and oversee the company’s compliance, as well as the development of relevant policies, information systems, and internal controls, to ensure that AI use is consistent with legal, regulatory, and ethical obligations, with appropriate safeguards to protect against risks. See the Sidley articles here and here and listen to the Sidley webinar on the EU AI Act here.
– Refresh policies on corporate statements about high-profile social and political issues. Companies may face negative consequences to their business or reputation whether they speak or stay silent. Accordingly, companies may wish to consider adopting policies and processes for determining what issues to speak out on and when, who has authority to speak, and which types of statements (if any) require board notification or prior approval. These decisions should align with a company’s core values and take into account the potential benefits and risks associated with taking a position. See the Sidley article here.
Other action items addressed in the memo include amending corporate charters to provide for officer exculpation, implementing systems to ensure compliance with new cyberdisclosure regulations, staying apprised of EU and California climate disclosure rules and pending SEC climate disclosure rulemaking, and preparing for compliance with the new EU subsidies regulation.
Many state bars have a calendar year-end deadline for obtaining required CLE credits. If you’re like me, that means you frequently find yourself scrambling in December to complete your CLE requirement. That crunch can result in lawyers signing up for some pretty strange last-minute courses. For example, a friend and former colleague of mine who’s an M&A lawyer spent a few hours last New Year’s Eve attending an online CLE program on “Litigating Truck Accidents in Ohio.” Hey, like they say, beggars can’t be choosers.
I think many of us have found ourselves in a similar position when we’re up against a CLE deadline, so we thought that helping our members avoid spending their New Year’s Eve listening to irrelevant CLE programs would make the perfectly holiday gift – and that’s exactly what we’ve done. Effective immediately, each of our 2023 webcasts is eligible for on-demand CLE credit!
Is there any fine print? Don’t be silly – of course there is. In order to qualify for CLE credit, you must follow the following instructions:
– Watch the recorded program by clicking “Access On Demand Program/Earn CLE Credit” on the webcast homepage. You must watch the entire program and may not skip ahead or close the video player screen.
– When the program has concluded, you’ll need to click the link at the bottom of the video player, “Click Here to Access the Form,” and enter your state and license information.
– If you have questions about CLE Credit, please visit our CLE FAQ page or contact our CLE provider: CEU Institute, accreditation@ceuinstitute.net.
All approvals for CLE credit are at the discretion of the state bar based on content and deadlines. Pending state bar approvals, these courses will be eligible for credit for two years. The CLE provider for these events, CEU Institute will seek CLE credit for the webcast in applicable states. All credits will be subject to each state’s decision on accreditation. A CLE certificate will be sent if/when approved by that state.
We are always looking for ways to enhance the benefits of membership in TheCorporateCounsel.net, and hope you’ll agree that offering easy access to high-quality, relevant, on-demand CLE programs makes a membership in TheCorporateCounsel.net even more valuable! If you are not a member, email sales@ccrcorp.com or sign up online today and get access to on-demand CLE and all of our other resources.
Shearman & Sterling recently released its 2023 Corporate Governance & Executive Compensation Survey. Among other topics, the survey reviews disclosure practices among the largest 100 US public companies concerning executive departures, which have been the subject of closer attention following the McDonald’s enforcement proceeding earlier this year. Here are some of the key findings:
– Of the executive officer departures disclosed in Forms 8-K filed by the Top 100 Companies during the period reviewed, none characterized the executive officer’s exit as being a result of the “mutual agreement” or “mutual decision” of the company and the executive officer. However, a survey of these disclosures reveals that describing an executive officer’s departure as “mutual” in other ways remains a common practice.
– Although the sample size and the period of review is limited, the fact that none of the Top 100 Companies used historically common phrasing to characterize the termination may be an indicator of the beginning of a shift in disclosure practices.
– Separation payments were disclosed in connection with 23% of executive officer terminations, with 17% of executive officer retirements disclosed describing amounts paid to executive officers in connection with their retirement, including six companies that described new agreements executed in connection with the executive officer’s retirement.
– Separation payments were also described with respect to one of the terminations characterized as a termination without cause, one termination characterized as an involuntary separation and approximately half of the other termination descriptions identified. In certain of the disclosures, the company expressly indicated that the circumstances of the executive officer’s termination of employment were consistent with a “qualifying termination” under the company’s existing executive severance plan or the executive officer’s employment agreement.
– There was no indication that any new entitlements were not disclosed. In this set of termination disclosures, there does not appear to be any perceivable shift in approach, which suggests that companies are not expanding disclosure to cover an explanation of why they determined to make (or not make) payments under existing entitlements.
The survey also noted a number of interesting findings in other areas. For example, it found a 25% increase in the number of Top 100 Companies with a director specifically identified as having cybersecurity experience, and a 42% jump in disclosure of director-specific diversity information.
Earlier this year, I blogged about pending legislation that would repeal foreign private issuers’ exemption from Section 16 of the Exchange Act. Yesterday, Alan Dye provided an update on the bill’s status on the Section16.net Blog. He says that legislation is dead, at least for now:
I said in this earlier blog that I would try to get to the bottom of how a proposal to rescind the SEC’s Section 16 exemption for insiders of foreign private issuers found its way into the National Defense Authorization for 2024, which passed the U.S. Senate on July 27, 2023. The proposed rescission was not in the House bill and was dropped in conference, so it’s not going to be enacted this year, if ever. For those interested in what the proposal is about, though, read on.
The proposal was originally introduced in the Senate in 2022, as a standalone bill entitled the Holding Foreign Insiders Accountable Act. The bill was intended to address trading abuses identified by former Commissioner Robert Jackson (now at NYU law school) and Wharton professors Bradford Levy and Daniel Taylor in an April 2022 paper entitled “Holding Foreign Insiders Accountable.” The authors examined trading by insiders of certain foreign private issuers, particularly Russian and Chinese issuers, and concluded that insiders of many of those companies avoided trading losses by selling their company stock shortly before significant declines in its price. In an opinion piece they wrote for the Wall Street Journal, Senators Kennedy and van Hollen said that American investors absorb most of the losses avoided by foreign insiders and that subjecting those insiders to Section 16 would alert investors to insider sell-offs and give American law enforcement agencies better ability to identify insider trading.
The bill went nowhere in 2022 but was re-introduced in 2023 and later merged into the National Defense Authorization Act for 2024.
We’ve posted the transcript for our recent “SEC Enforcement: Priorities and Trends” webcast featuring Hunton Andrews Kurth’s Scott Kimpel, Locke Lord’s Allison O’Neil, and Quinn Emanuel’s Kurt Wolfe. The webcast covered:
SEC Enforcement Activities in 2023 and Priorities for 2024
Monetary and Non-Monetary Penalties
Accounting and Disclosure Actions
Actions Targeting Gatekeepers
Whistleblower Developments and Trends
Self-Reporting and Cooperation Credit
Coordination with DOJ Investigations
Our panelists referred to the SEC’s fiscal 2023 as “the year of the whistleblower” and stressed “how successful the [whistleblower] program continues to be” as “it really is driving enforcement investigations and enforcement actions [and] changed the way that the SEC originates cases and pursues cases.” They linked this back to the SEC’s recent Rule 21F-17 enforcement actions that “strike at efforts to chill whistleblowers.” Scott Kimpel said, “that’s why the SEC does it. They want the word to spread. They don’t want to have to keep bringing those cases. They would prefer for companies to change their language.”
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.
The SEC adopted its human capital disclosure rules in 2020, and this Gibson Dunn memo reviews the results of a survey of S&P 100 Form 10-K disclosures since the rules were adopted. Overall, the survey found that companies were generally tailoring the length & topics covered in their disclosures and those disclosures were becoming slightly more quantitative in some areas. Here are some of the key takeaways concerning disclosure trends during the most recent year:
– Length of disclosure. Forty-eight percent of companies increased the length of their disclosures, four percent of companies’ disclosures remained the same, and the remaining 48% of companies decreased the length of their disclosures (with the decreases generally attributable to the removal of discussion related to COVID-19).
– Number of topics covered. Twenty-two percent of companies increased the number of topics covered (with the categories seeing the most increases being diversity statistics by race/ethnicity and gender, employee mental health, monitoring culture, talent attraction and retention, and talent development), while 34% decreased the number of topics covered (the majority of which were attributable to the removal of disclosures related to COVID-19), and the remaining 46% covered the same number of topics.
– Breadth of topics covered. The prevalence of 16 topics increased, seven decreased, and four remained the same. The most significant year-over-year increases in frequency involved the following topics: quantitative diversity statistics on gender (60% to 65%), employee mental health (46% to 50%), culture initiatives (22% to 26%), efforts to monitor culture (60% to 64%), and talent attraction and retention (90% to 94%). The most significant year-over-year decrease involved COVID-19 disclosures, which declined in frequency from 69% to 34%. Other year-over-year decreases involved discussion of governance and organizational practices (56% to 51%) and diversity targets and goals (23% to 19%).
– Most common topics covered. The topics most commonly discussed this most recent year generally remained consistent with the previous two years. For example, diversity and inclusion, talent development, talent attraction and retention, and employee compensation and benefits remained four of the five most frequently discussed topics, while quantitative talent development statistics, supplier diversity, community investment, and quantitative statistics on new hire diversity remained four of the five least frequently covered topics.
The memo also addresses industry trends in human capital disclosure, the potential for new rulemaking and the IAC’s recommendations to the SEC concerning that rulemaking, Staff comments on human capital disclosure, and the implications of recent SCOTUS cases on corporate DEI programs and related disclosures.
The last time we blogged about the Payroll Protection Plan loan program, the SBA Inspector General was reporting that the levels of fraud in the program were truly mind-blowing. Since that’s the case, it’s probably not surprising that according to this McDermott Will memo, many PPP borrowers find themselves ensnared by red tape when it comes to trying to get their loans forgiven, and many of those whose loans have previously been forgiven are now facing audits. This excerpt addresses the predicament of borrowers who have won appeals of SBA denials of forgiveness:
Some businesses are facing an increasingly common predicament: They appealed an unfavorable Final Decision to the [SBA’s Office of Hearings & Appeals]. The OHA granted their appeal, agreeing with the borrower that the SBA’s decision was based on clear error. The OHA then remanded the loan back to the SBA to conduct a new review, and the business is forced to wait for months for the SBA to act on the loan.
Other borrowers are in a similar situation after filing an appeal with the OHA only to have the SBA withdraw the challenged Final Decision and place the loan back under review with no further communication from the SBA regarding the status of the loan. These businesses have been waiting and waiting for months—and in some cases more than a year—for the SBA to issue a new decision.
The memo says that once a Final Decision has been withdrawn, the borrower faces what feels like a “black hole” of SBA review. It suggests that the problem stems from both a lack of resources & a lack of a sense of urgency on the part of the the SBA to resolve outstanding loans in a timely manner. On another happy note, the memo says that there’s been an uptick in audits of borrowers who have had their loans forgiven years ago. The most significant issues in these audits are whether the borrower correctly calculated its initial PPP loan amount and whether the borrower was “small” enough to qualify for the loan.