As John shared in early May, the Division of Enforcement recently announced enforcement proceedings against the BF Borgers CPA PC accounting firm and its sole partner that included a permanent suspension of the firm and its owner. That suspension has significant and unfortunate, to say the least, implications for the firm’s public company audit clients.
Yesterday evening, the SEC announced an exemptive order providing an extension to certain companies affected by the suspension. The order provides that, for any reporting company that notified the Commission between May 3 and May 16 pursuant to Rule 12b-25 of its inability to timely file a quarterly or transition report on Form 10-Q due to the BF Borgers suspension order, the Form 10-Q will be deemed to be filed on its prescribed due date as long as it is filed no later than the 30th calendar day (instead of the 5th calendar day) following the due date.
While it may not be a familiar name, BF Borgers has been a fairly significant player for small-cap issuers — ranking 8th in overall market share for public company audits last year & 6th in market share for non-SPAC initial public offerings. The order recognized that these impacted companies need to hire new, qualified, independent, PCAOB-registered public accountants and that any replacement firm will have to review the included financial information and potentially re-review comparable interim financial information, which may be practically impossible with the limited extension permitted by Rule 12b-25.
This recent Barnes & Thornburg blog gives a timely reminder that one of the audiences listening to your earnings calls is regulators. It discusses the SEC’s continued focus on consistency among various disclosures and its use of earnings calls to comment on SEC filings.
The blog highlights a spring 2024 comment letter focused on known trends or uncertainties disclosures in MD&A and company comments on a fourth-quarter earnings call regarding the company’s refinancing strategy. The company’s response to the comment called out business section and related MD&A quantitative disclosures but also agreed to further address the strategy in MD&A by adding a new narrative paragraph.
Other recent comment letters address the importance of “synchronizing what will be said on the earnings call with what will be disclosed in a company’s SEC filings.”
This follows two other recent comment letters from SEC staff related to earnings calls: A January 2024 letter and response that discussed whether metrics mentioned by a company’s CEO on earnings calls two quarters in a row were key performance indicators for the business and another from the same month that asked whether refurbishment revenue that was discussed on the past two quarters’ earnings calls should be broken out separately in the notes to a company’s financial statements.
The blog suggests that the folks who prepare MD&A pull recent earnings call transcripts when drafting. I’d also add that someone needs to review the earnings call script and MD&A disclosures for consistency — possibly twice each quarter to ensure it’s done on nearly final versions. The script, prior call transcripts, and analyst reports are also helpful resources for outside counsel to add value by doing a holistic review. Sometimes it may also be appropriate to add language to the 10-Q or 10-K before filing if senior management responds to a question or adds color on the earnings call that the financial reporting team deems worthy of including.
It may have a frightening headline — “500+ proxy statements contain up to multi-million dollar XBRL tagging errors” — but don’t be scared away! This Toppan Merrill blog details common PvP tagging errors, with examples, and the first step in avoiding these problems is understanding how they happen!
One common issue involves incorrectly tagging the adjustments necessary to calculate “compensation actually paid.” Multiple numbers in the PvP table must be tagged as reductions to SCT total compensation, not additions, despite being presented in the table as non-negative numbers:
To ensure the XBRL tagging presents the exact same information, the XBRL preparer must know to enter values in column b and d as ‘negative’ (as deductions), even though the values in these two columns are shown as ‘positive’ (with no parentheses) in the table.
When XBRL preparers erroneously entered the values in column b and d as positive, the XBRL calculated value (machine-readable value) of the executive compensation actually paid would be a+b+c+d+e+f+g = $161,425,424 versus the value $120,865,280 as shown in the table.
Double counting is also common in tagging “compensation actually paid” adjustments. The blog recommends that companies develop new processes to ensure that there are no tagging errors in their proxy statements, if they haven’t already, and confirm that the XBRL-tagged data tells the same story as the human-readable information.
As a reminder, we know this is a focus area for the Staff from a “Dear Issuer” letter posted after the 2023 proxy season and that the Staff is using XBRL tagging to identify PVP disclosures that appeared to be lacking, which the Staff reiterated in recent comments at SEC Speaks and the ABA Business Law Section Spring Meeting.
Last Friday, SEC Corp Fin Director Erik Gerding and Chief Accountant Paul Munter issued a joint statement on the application of IFRS 19 in SEC filings by foreign private issuers. The statement follows a May 9 announcement by the IASB regarding the issuance of a new Accounting Standard IFRS 19 — Subsidiaries without Public Accountability: Disclosures — which permits eligible subsidiaries to “provide reduced disclosures when applying recognition, measurement, and presentation requirements of IFRS Accounting Standards.”
The statement acknowledges that IFRS 19 is limited to entities that do not have public accountability at the end of their reporting period, but notes that financial statements that apply IFRS 19 may be included in SEC filings in certain situations. When that’s the case, the statement says IFRS 19 will necessitate additional disclosures to meet the needs of the intended audience. They point to the requirement in IFRS 19 to consider whether additional disclosures are necessary to provide an understanding of particular events or circumstances.
As just one example, if a foreign private issuer files documents with the SEC related to a merger with a foreign business that qualifies for and elects to apply IFRS 19, and the registrant is required to provide financial statements of the foreign business, the foreign business is required by IFRS 19 to consider whether additional material disclosures need to be included in its financial statements to enable investors to understand the impact of transactions, other events, and conditions on the foreign business’s financial position and financial performance.
The purpose of including the foreign business’s financial statements in the SEC filing at the time of the transaction is to help investors better understand the nature and extent of the business being acquired and the resulting combined entity when making their voting or investment decisions. Given the purpose of inclusion of the foreign business’s financial statements in the registration statement, the needs of investors would likely be similar to the needs of investors in an entity with public accountability.
In such a scenario, even though the foreign business may be eligible to and has elected to apply IFRS 19 in order to benefit from reduced disclosures, it should carefully consider whether it is nevertheless required to include additional material disclosures from other IFRS Accounting Standards to achieve the objectives of financial reporting given the use of those financial statements in a filing with the SEC.
The statement concludes with a reminder that the Division of Corporation Finance and the Office of the Chief Accountant are “available for consultation,” including on the application of IFRS 19 in SEC filings.
In case you missed it, meme stocks are having a moment again — so much so that the WSJ speculated that “online subcultures might have a permanent influence on the market.” But a number of factors are different this time around. Among them is the looming shift to T+1 settlement, which was motivated in part by the original meme-stock craze and should address the increased margin requirements that caused Robinhood to block purchases of meme stocks.
But that doesn’t lessen the extreme volatility meme stock attention can cause for a “mid-cap” company’s stock. This AP article notes that, despite no change in Game Stop’s prospects:
GameStop’s share price was swinging so sharply after the opening bell Monday that trading in the stock was halted nine times in just over an hour. On Tuesday, the movements for AMC Entertainment were even wilder, and its trading was halted 18 times by early afternoon.
This King & Spalding alert from the time of the original meme-stock craze in 2021 noted that affected companies responded in varied ways. It also addresses key considerations for issuers of meme stocks, including when public disclosure is advisable, what might happen at the annual meeting, the impact on equity incentive plans and, of course, important questions for capital raises or when insiders want to trade.
Last week, the SEC announced that Corey Klemmer, most recently the Corporation Finance Counsel to Chair Gary Gensler, has been appointed as Policy Director. She succeeds Heather Slavkin Corzo, who is leaving the agency. The press release highlights their contributions to the SEC:
Ms. Slavkin Corzo was one of Chair Gensler’s first appointments to his senior staff. She joined the SEC in April 2021 and led a team of policy experts who advise Chair Gensler on SEC rulemakings and other regulatory issues. She oversaw the proposal and adoption of nearly 40 rulemakings relating to market structure, issuer disclosure, fund oversight, and other areas critical to investor protection and capital formation. […]
Ms. Klemmer joined the SEC in July of 2021. Since then, she has supported the Chair in proposing and adopting rules implementing the Holding Foreign Companies Accountable Act and outstanding Dodd-Frank mandates, as well as updating insider trading rules, beneficial ownership disclosures, and the regulation of special purpose acquisition companies. For the last two years, Ms. Klemmer has worked in a project management capacity across the policy agenda.
Yesterday, the SEC announced that it had adopted amendments to Regulation S-P, which are the rules that that govern the treatment of consumers’ nonpublic personal information by certain SEC-regulated financial institutions, such as broker-dealers, funding portals, investment companies, registered investment advisers, and transfer agents. In a fairly rare move these days, the Commission unanimously supported the adoption of these amendments. Regulation S-P has been around since 2000 and was adopted pursuant to the Gramm-Leach-Bliley Act. These amendments were proposed back in March 2023.
As noted in the SEC fact sheet about the amendments, the SEC’s action modernizes and enhances the protection of consumer financial information by:
– Requiring covered institutions to develop, implement, and maintain written policies and procedures for an incident response program that is reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information;
– Requiring that the response program include procedures for covered institutions to provide timely notification to affected individuals whose sensitive customer information was, or is reasonably likely to have been, accessed or used without authorization; and
– Broadening the scope of information covered by Regulation S-P’s requirements.
These amendments will become effective 60 days after publication in the Federal Register. Larger entities will have 18 months after the date of publication in the Federal Register to comply with the amendments, and smaller entities will have 24 months after the date of publication in the Federal Register to comply.
As this Jenner & Block alert notes, ONCD Director Harry Coker, Jr. indicates that the United States’ cybersecurity regime is in the midst of “a fundamental transformation,” moving from a reactive to a proactive posture in order to keep pace with a fast-evolving cyber threat landscape. The Jenner alert further notes the following key takeaways:
The Posture Report is largely retrospective and serves as an index of the federal cyber initiatives over the past year, listing the various accomplishments of the over 24 federal agencies contributing to this effort. Conversely, the NCSIP is prospective and outlines the 100 initiatives the federal government will take to implement the NCS.
Together, these reports analyze the challenges and opportunities ONCD plans to target in the next year. The benchmarks point toward an increased scrutiny of and reliance on the private sector to reshape the digital ecosystem and enhance the United States’ resilience to cyber threats. Private sector organizations often have visibility into certain aspects of malicious activity that the federal government does not and hold much of the power to reverse insecure practices by implementing Secure by Design principles and patching security vulnerabilities. Another trend is an increased focus on developments in advanced computing technologies like quantum computing and AI and preparing for these technologies via cyber workforce training and interagency coordination.
Furthermore, the federal government is looking externally to risks posed by China, Russia, Iran, and North Korea, and non-state criminal organizations. However, these reports stress that many of the solutions to these risks are also external to the United States, based in coalition building and compatible international standards.
Overall, these communications emphasize the importance of the private sector to address the ever-changing cybersecurity threat environment.
We now find ourselves in the heart of commencement season, and I am focused on my own daughter’s graduation from high school in just a week and a half. With the advent of social media, we are now able to get a daily dose of terrible commencement addresses that are going on around the country, with an occasional good one sprinkled in for good measure. I honestly cannot remember a single thing that was said during the various commencement addresses that occurred when I graduated from several different levels of schooling, and further I cannot remember the names of the commencement speakers. I also did not have a camera available on my phone to record those commencement addresses for posterity or for gratuitous distribution to the wider world. In any event, this focus over the past few weeks on commencement addresses got me thinking about what I would say in the unlikely event that I was ever asked to speak to students at a commencement, and here are my thoughts:
1. Enjoy the Moment. As I am experiencing at the moment, there is an awful lot of build-up to the moment of graduation, and then all of the sudden it seems to have passed by and you are expected to magically embark on your new life after graduation. To avoid this phenomenon, it is important to stop and savor the moment. An enormous amount of hard work and dedication is required to get to graduation, and it is very important to recognize that effort and share the joy with your family and friends. Don’t miss the moment by focusing too much on the future.
2. Be Open to the Possibilities. We seem to live in an age today of increasing specialization, where high school students are expected to pick their colleges based on their anticipated career path. I am not sure how we can expect sixteen to eighteen year-olds who have never really experienced the world of work decide on their career path. I originally wanted to be a car designer because I was into cars. When I got to college, I studied accounting because my older brother was an accounting major. I then studied economics when I did poorly in my intermediate accounting class. At various points during my journey through higher education, I aspired to be a philosophy professor, economist and financial analyst. I never once considered being a lawyer until I was in graduate school for finance and the economy remained in bad shape, so staying in school seemed attractive. I think it all worked out for me in the end, because I remained open to the possibilities without operating exclusively on pre-conceived notions of what I was best suited to do with my life.
3. Don’t Be So Hard On Yourself. Young adults and kids have had it pretty hard these past few years. The one-two punch of the pandemic and the proliferation of social media has had an outsized influence on their lives. We all need to recognize that and do everything we can to support them. In my experience, they tend to be very hard on themselves, and they really feel the pressure. As someone who has always been subject to my fair share of self-doubt and self-loathing, my advice is to try to dial it back as best you can. A little bit of being hard on yourself is actually not a bad thing, but a lot of it can be overwhelming. Give yourself a break, it is going to be OK!
4. Build Your Brand. No matter what you do in life, it is important to have your own “brand.” That brand is something that you carry around with you forever, and, if your brand is properly managed, it will open doors for you in your professional and personal life. At the core of anyone’s brand should be honesty, integrity and ethical conduct. There is no way around building off of that foundation. Your brand should not just be about you, but also about how you help others in your profession, your community and the world at large. A brand takes an enormous amount of time and energy to build, and it can be destroyed in an instant, so do everything you can to nurture and protect your brand.
5. Be Yourself. I believe that one of the greatest lessons that I have learned over the course of my career is the importance of being yourself. When you are embarking on your career, there is so much pressure to conform to things like your work environment and customer or client expectations, and some level of conformance is inevitable and often times advisable to succeed. Ultimately, however, authenticity is critical to human interaction, therefore it is important to not lose yourself in the pursuit of success, however that is measured.
I could certainly go on, but no one is going to remember these words at any time in the future. I promise that AI did not generate this commencement speech, although I acknowledge that it might have actually come out better if I had let AI do the job.
The Wall Street Journal editorial board is highlighting today a new report from the Committee to Unleash Prosperity, which indicates a sharp drop-off in institutional investor support for ESG proposals in 2023 as compared to 2022. The Committee to Unleash Prosperity, in case you were wondering, was co-founded by conservative writer Stephen Moore, economist Arthur Laffer, financial news commentator Larry Kudlow and publisher and politician Steve Forbes. The stated mission of the Committee to Unleash Prosperity is “to educate policy makers and the public about government policies that have been proven, in practice, to maximize economic growth and equitable prosperity in America and around the world.”
The WSJ editorial board notes that the report indicates some significant retrenchment on the part of large funds with respect to ESG proposals:
The news this year is that some of the funds are backtracking. The latest report finds that support for ESG resolutions dropped 25% in 2023 from 2022, including a 30% drop among the 25 most active fund families. Progressive shareholders—often with only a few shares—are putting forward more proposals than ever, trying to pressure executives into adopting their causes as corporate policy. But non-ESG-branded funds aren’t backing them like they were a year ago.
The WSJ piece attributes the change in part to a reluctance on the part of some funds to follow ISS and Glass Lewis recommendations on ESG proposals, stating:
One cause of the shift is asset managers’ growing reluctance to follow the direction of the proxy-adviser duopoly, Institutional Shareholder Services (ISS) and Glass Lewis. The firms claim about 97% of the market for guidance on shareholder votes, and they back ESG at an overwhelming rate. Both earned lower grades than most of the funds they advise—a D for Glass Lewis and an F for ISS. Until last year most fund managers seemed to accept the duopoly’s recommendations as gospel.
Today more fund executives are second-guessing the proxy advisers’ guidance. “It is increasingly clear that proxy advisers have undue influence,” wrote JP Morgan CEO Jamie Dimon in his April letter to shareholders. His firm’s asset-management arm was among the dozens that rejected more ESG proposals last year, and he suggested that managers ought to do more of their own research on how to vote.
The WSJ editorial board concludes that “[t]he funds rejecting ESG are embracing their responsibility to investors. All asset managers have a fiduciary duty to maximize returns, and that includes their approach to proxy voting.”
On a side note, I studied economics as an undergraduate and had plans to go on to get a PhD and become an economist, but bailed on that plan when I opened up the “subject test” part of the GRE exam. I am pretty sure the first question in the test had something to do with the Laffer Curve, which was developed by Arthur Laffer to depict the theoretical relationship between rates of taxation and the resulting levels of the government’s tax revenue. Reading that question made me decide then and there that I had absolutely no interest in being an economist, so I turned the test in unfinished and left the building. So, for that career twist that saved me from a life of debating how many angels can dance on the head of a pin, I am indebted to Arthur Laffer!