Last month, Lynn blogged about calls for changes to Rule 10b5-1, and it now looks like potential changes are officially in the works. In remarks to the WSJ’s CFO Network Summit yesterday, SEC Chair Gary Gensler said that 10b5-1 plans had led to “real cracks in our insider trading regime” and announced that he had asked the Staff to provide recommendations on how the SEC might “freshen up” Rule 10b5-1. Gensler detailed a number of specific areas of concern in his remarks. These include:
– The lack of a mandatory “cooling off period” between the time a 10b5-1 plan is adopted and the first trade, which he said might be perceived by some bad actors as a “loophole” to participate in insider trading. Gensler noted that the idea of a cooling off period of between 4 to 6 months had received bipartisan support and should be explored further.
– The ability of insiders to cancel 10b5-1 plans at any time, which allows them to exit a plan while they’re in possession of MNPI.
– The lack of mandatory disclosure requirements regarding the adoption, modification, and terms of Rule 10b5‑1 plans.
– The absence of limits on the number of 10b5-1 plans that insiders can adopt. The ability to adopt multiple plans and cancel them may lead the. With the ability to enter into multiple plans, and potentially to cancel them, Gensler says insiders might have the mistaken belief that they a “free option” to select the most favorable plan to sell under.
Gensler also indicated that the Staff will look into other possible reforms to the rule, “including the intersection with share buybacks.” None of the specific areas of concern that the Chair identified in his remarks comes as any great surprise, and all involve actions that run contrary to consensus “best practices” for 10b5-1 plans. In fact, since Jay Clayton touched on many of these concerns about 10b5-1 plans in a November 2019 speech, this may be one of those rare areas where we might have reason to hope that proposed rule changes might actually receive bipartisan support among the commissioners.
If you’ve been reading my blogs for a while, then you know that the institutional investor-led crusade against dual-class IPO structures has long been one of my favorite hobby horses. I didn’t think there was any way that I could have been less sympathetic to institutional investors’ “buy first, whine later” approach to dual-class IPOs – that is, until I saw the disastrous Deliveroo IPO unfold across the pond.
This article from FT.com indicates that one of the reasons that the offering tanked is that investors balked at its dual-class structure. Of course, a dual-class structure is novel in London, and it was also far from the only bit of hair on that deal, but some of the City’s biggest investors nevertheless cited it as one of the reasons they refused to sign-on. I say good for them – and what’s stopping U.S. institutions from doing the same?
In responding to a question like this, institutions frequently point to supposedly insurmountable “collective action problems” around this issue, or they cite the plight of the poor index funds, which have no choice but to buy stocks included in the relevant indices. But I think there’s evidence to suggest that if an IPO truly raises significant governance concerns, institutions are willing to walk away from it. I also think that whatever its merits when it comes to aftermarket purchases, the point about index funds doesn’t carry much weight when it comes to pushing back against dual-class IPOs, because index funds don’t buy IPOs.
All that leads me to believe that complaints about dual-class IPOs aren’t about “good governance” – whatever that means. Instead, they’re tactical. They’re designed to ensure that investors who provide fresh capital at the time of the IPO or afterward ultimately have the upper hand at public companies.
There’s nothing wrong with that objective, but I don’t believe there’s anything wrong with founders using their leverage to push back against it. There’s no reason for the exchanges, the SEC, Congress or the Delaware legislature to intervene. Institutions have all the tools they need to fight this fight on their own. In fact, they have trillions of them.
We’ve blogged a few times about the SEC’s use of data analytics in enforcement. This Troutman Pepper memo says that the SEC is increasingly data-driven in its approach to identifying potential enforcement targets for enforcement actions. This excerpt highlights some specific areas where the SEC’s data analytics tools are being brought to bear:
Recent enforcement actions suggest that the SEC is targeting quarterly public filings. Quarterly reports are not subject to the same accounting oversight as annual reports. Recent cases highlighted by the agency as examples of data-based enforcement actions suggest that the SEC’s focus with data-based investigations is on quarterly reports and other areas where manipulation may be more likely to occur.
Reading between the lines of the press releases surrounding recent enforcement actions and other SEC commentary, it appears that the targets for these new enforcement initiatives are relatively small manipulations to figures that can have an outsized effect by causing a company to meet analysts’ EPS expectations or attain other quarterly results that, while not necessarily material in and of themselves, can have a significant impact on analyst and investor expectations or outlooks.
The memo says that the takeaway from recent enforcement actions a recurring pattern of meeting or barely exceeding EPS estimates may attract the SEC’s attention, particularly if that performance seems to be driven by “a single category that may register as an outlier against a company’s previous filings.” That kind of targeting suggests that the SEC’s data analytics tools are allowing it to zero in on previously hard-to-detect violations that in the past would have required significant resources to identify.
Apparently, public companies aren’t the only entities that prefer the occasional Friday news dump when it comes to controversial announcements. At approximately 4:00 pm eastern time on Friday, the SEC announced that it had removed PCAOB Chair William Duhnke and had designated Duane DesParte to serve as acting Chair. At the same time, the SEC announced that it was seeking candidates to replace all five current members of the PCAOB board. This article by Politico’s Kellie Mejdrich provides an overview of the politics behind the shakeup. Here’s an excerpt:
The sudden firing followed mounting pressure from [Senators] Warren, Sanders and several left-leaning groups who in recent weeks called on SEC Chair Gary Gensler to replace the entire board leading the PCAOB. The progressives warned that the agency, which was established after the Enron and WorldCom accounting scandals to inspect public company audits, was failing to crack down on corporate wrongdoing and was captured by industry.
Warren said Duhnke’s removal was “absolutely the right move” and she signaled that she would push for a bigger shakeup. The SEC, which is also responsible for hiring the PCAOB’s leaders, may grant her wish. The agency said it would seek candidates for all five of the regulator’s board positions, even as three of its members who serve five-year terms remain in place.
Over on the Radical Compliance blog, Matt Kelly reviews Duhnke’s “tumultuous and controversial” tenure as Chair of the PCAOB and provides some thoughts about what the changes are likely to mean for auditors and compliance professionals.
The SEC’s action prompted a dissenting statement from commissioners Peirce & Roisman, who said that the SEC acted in an “unprecedented manner that is unmoored from any practical standard that could be meaningfully applied in the future.” Mindful of the fact that under the leadership of Jay Clayton, the SEC took similar action to replace all incumbent PCAOB board members in 2017, the dissenting commissioners said that action was distinguishable, since most of the board members who were replaced at that time were serving after their terms had expired.
The dissenters didn’t mention the fact that the SEC’s 2017 action was also unprecedented. As the WSJ noted at the time, it represented the first time that PCAOB directors who desired a second term had ever been denied that opportunity by the SEC. That action was followed up by the SEC’s controversial decision to deny board member Kathleen Hamm a second term in 2019.
In light of the history here, the dissenters sound a bit like Captain Renault from Casablanca. C’mon guys, the PCAOB has been a political football for some time now, and what’s sauce for the goose is sauce for the gander.
A few weeks ago, I blogged about efforts to come up with a fix for the accounting issues associated with SPAC warrants identified in the joint statement from Corp Fin leadership. According to this White & Case memo, discussions between the accounting firms active in the SPAC market and the Staff have resulted in a consensus on how to structure SPAC warrants to permit them to be classified as equity & not as liabilities for financial reporting purposes.
The memo walks through the steps necessary to achieve equity treatment for pre-IPO SPACs, and this excerpt addresses the alternatives available to post-IPO SPACs to address their outstanding warrants:
SPACs that have completed their IPOs need to consider, in connection with their initial business combinations, whether to amend their warrant agreements to implement the changes to classify their warrants as equity instruments after the consummation of the business combination.
If the post-business combination company will only have a single class of common stock, the tender offer provision described above will not preclude equity classification because it would only be triggered when there is a change in control. In that case, only the private placement warrants would need to be addressed. If the post-business combination company will have a dual class structure (e.g., where certain former owners of the target company receive super-voting stock in the business combination), then the public warrants also will need to be addressed.
There are three approaches to be considered:
– Accept liability treatment for the warrants on a going forward basis;
– Seek the approval of warrantholders to amend the warrant agreement concurrently with the solicitation of approval of the SPAC’s stockholders for the business combination; or
– Rely on the “warrant table,” if applicable, or a tender/exchange offer after the consummation of the business combination, to “redeem” or repurchase some or all of the then-outstanding SPAC warrants.
The memo says that if the parties desire to amend the warrant agreement, they will need to review that agreement’s amendment provisions in order to determine whether the holders of public warrants or private placement warrants need to approve the proposed changes.
We’ve posted the transcript for our recent webcast: “Capital Markets 2021.” If your practice involves capital markets transactions, you’ll want to check this out. Panelists Katherine Blair of Manatt, Sophia Hudson of Kirkland & Ellis, and Jay Knight of Bass Berry & Sims participated in an in-depth discussion of a number of topics, including:
– The State of the Capital Markets
– The SPAC Phenomenon
– Equity Financing Alternatives for Public Companies
– Debt Financing Alternatives: Investment-Grade/Non-Investment-Grade Issuers
– Recent Offering/Issue Trends
Last month, the SEC threw a monkey wrench into the SPAC market when the Corp Fin Director & the Chief Accountant issued a joint statement on accounting for SPAC warrants. To make a long story short, the Staff’s position is that a lot of SPACs may have been incorrectly classifying certain warrants as equity instead of as a liability. As Lynn suggested it might when she blogged about the joint statement last month, the Staff’s position has led to a wave of restatements.
But a wave of restatements might not even have been the biggest problem arising out of this guidance for SPACs. That’s because SPAC IPOs have essentially come to a halt due to uncertainties about what tweaks to warrant terms would satisfy the SEC. Now, according to this CFO Dive article, a fix may be in the works:
A form of warrant that isn’t accounted for as a liability for special purpose acquisition companies (SPACs) is under development, but until that process is completed and gets an okay by the Securities and Exchange Commission, sponsors and others with an interest in the market face uncertain terrain, Gerry Spedale said in a Gibson, Dunn Crutcher webcast last week.
“You have accounting firms and law firms working together on that form, and that needs to get blessed by the SEC before everyone’s going to be comfortable moving forward with that approach,” said Spedale, a Gibson, Dunn & Crutcher partner.
The article says that this process is going to take several weeks, which means the SPAC IPO market is going to continue to face significant uncertainty for a while longer. Then again, maybe that’s not such a bad thing.
SEC Enforcement: “Known Trends” Continues to Trend
Earlier this month, the SEC announced a settled enforcement proceeding against Under Armour arising out of allegedly misleading disclosures concerning the reasons for revenue growth and failing to disclose known uncertainties about future revenue growth. This Locke Lord blog points out that efforts to manage earnings to meet analyst expectations may have consequences for MD&A disclosure even if they don’t involve improper accounting:
According to the SEC order, Under Armour, in order to meet analyst projections and sustain its 20% quarter over quarter revenue growth record, pressured customers to move purchases forward into the current quarter, and did this for a number of consecutive quarters. There was no finding that Under Armour’s accounting for these sales as revenues was improper since the sales were actually made.
However, Under Armour gave the same reasons for revenue growth as it had before in earnings releases and its MD&A, without indicating that it was pulling revenues forward to maintain its growth and that this was an unsustainable practice, especially since doing so made it harder to sustain the rate of growth as a result of increasing the prior year’s base and taking revenues from the later year.
Without admitting or denying the findings in the SEC’s order, Under Armour agreed to cease and desist from violations of Section 17(a) of the Securities Act and certain reporting provisions of the securities laws, and to pay a $9 million penalty.
It’s worth noting that this is the third “known trends” enforcement proceeding against a high-profile public company that the SEC has brought since the beginning of 2020. Diageo PLC settled similar charges in February 2020, and HP did the same last September. All of these proceedings involved MD&A disclosure shortcomings concerning the future implications of actions taken to enable companies to meet current period earnings estimates.
In Memoriam: Jason Morse
This has been a difficult week for all of us at CCRcorp. On Monday, May 17th, our friend and colleague Jason Morse passed away unexpectedly. Jason had been an Account Executive with our company for more than two years, and our office will be closed today in honor of his memory. On behalf of everyone at CCRcorp, I want to offer our sincere condolences to Jason’s family and friends, and in particular to his sons, of whom he was so proud.
Over the past several days, many colleagues have shared remembrances of Jason on our Intranet page. As I read them, I was struck by the repeated references to his kindness, generosity, and good cheer. One colleague remembered Jason as “the person who without fail would always wish me a “Good Morning!” with a big smile on his face, as soon as I walked into the office.” Several others mentioned how Jason made them feel so welcome when they first joined the company. Another told the story of how Jason gave away his own lunch to a colleague who had forgotten to bring his from home.
Many years ago, I read William Wordsworth’s poem “Tintern Abbey.” At one point in the poem, Wordsworth speaks of “that best portion of a good man’s life / His little, nameless, unremembered, acts / Of kindness and of love.” Those words resonated with me, and I found comfort in reflecting upon them when my own father passed away. Reading what my colleagues had to say about Jason brought those words to mind again. I hope they will serve as a source of comfort to his family and friends as they remember the life of this good man. May he rest in peace.
Last year, Lynn blogged about a Sanford Bernstein report that suggested stock buybacks were fading as a result of the pandemic & predicted that they were likely to be “severely curtailed” for the next several years. That seemed like a safe bet at the time, particularly when the CARES Act banned recipients of government bailouts from engaging in buybacks.
But according to this WSJ article, that prediction turned out to be about as good as the infamous Sports Illustrated cover that predicted the Cleveland Indians would win the AL pennant in 1987. A year later, and this excerpt says that buybacks are back with a vengeance:
After a year of hoarding cash, American corporations are ready to reward investors again. Companies across industries have been buying back stock and raising dividends at a brisk pace this year. That is a sharp reversal from 2020, when they suspended or cut such programs, warning of the urgent need to preserve liquidity in the early stages of the Covid-19 pandemic.
Already this year, U.S. companies have authorized $504 billion of share repurchases, according to Goldman Sachs Group data through May 7, the most during that period in at least 22 years. The pace of announcements trounces even the 2018 bonanza that followed the sweeping tax overhaul of late 2017.
Cleveland finished the 1987 season with a record of 61-101, 37 games behind the Tigers in the AL East. Still, I’m hard pressed to say Sports Illustrated did worse on that call than Sanford Bernstein did on this one.
Last year, it appeared that derivative claims based upon allegedly false or misleading corporate statements about diversity and other ESG-related areas might be the next big thing from the plaintiffs’ bar. But this Sidley blog says that, so far, these cases have fizzled.
Complaints in these cases generally allege breaches of fiduciary duty arising out of directors’ failure to address board diversity, and – in order to get into federal court – claims under Section 14(a) of the Exchange Act premised on allegedly false statements about diversity efforts in proxy statements. This excerpt from the blog says that these claims haven’t gotten much traction with courts:
The Facebook case was the first one decided. On March 19, 2021, Magistrate Judge Beeler held that the breach of fiduciary duty claims failed because the plaintiff did not establish that pre-suit demand was excused. In reaching this decision, the court stated that to show that demand would have been futile, the plaintiff needed to plead “actual or constructive knowledge that their conduct was legally improper” and that, in reviewing the actual composition of the board which included two black directors, four women directors and one director who is openly gay, the plaintiff had not satisfied the requirement.
These same facts also helped defeat the Section 14(a) claim of misleading statements about diversity in the company’s proxy. In addition, the court found that the statements in the proxy were immaterial as they were inactionable puffery and further, that there was no corporate loss that could be connected to the statements.
Of particular interest to those following Delaware law is that the court also held that the case had been filed in the wrong forum because Facebook had adopted a Delaware Chancery forum selection clause which was applicable to these claims.
The case against the board of Gap Inc. was similarly dismissed on April 27, 2021, on the basis of the company’s forum selection bylaw, which designated the Delaware Court of Chancery as the exclusive jurisdiction for derivative claims or breach of fiduciary duty claims. The plaintiff argued that applying the forum selection bylaw to this case was against public policy as it deprived her of the right to assert her Section 14(a) proxy statement claim, which can be brought only in federal court. Magistrate Judge Sallie Kim rejected the plaintiff’s arguments on the grounds that the plaintiff was not without remedy as she could bring her breach of fiduciary duty state law claims in Chancery Court.
The blog goes on to note that the more significant aspect of these decisions may be that both ND Cal. courts upheld Delaware forum selection bylaw provisions even when the result was that the plaintiffs’ Section 14(a) claims had no forum in which they could be brought. I recently blogged about that aspect of these decisions over on DealLawyers.com
Investor Conferences: Most Still Virtual for 2021
The country is finally starting to open up again as the pandemic begins to fade and the percentage of the vaccinated population continues to grow, but this IR Magazine article says that most sponsors of investor conferences aren’t ready to go back to fully in-person or hybrid events just yet:
While some investment banks are preparing for a tentative return to small in-person events in the coming months, the majority of investor events will likely continue to be held virtually this year, according to a study conducted by OpenExchange. Three out of four investor conferences during the second half of 2021 will be entirely virtual, according to OpenExchange’s survey of 139 decision-makers at 30 financial institutions.
The article says that sponsors are preparing for hybrid events, with 1/3rd expecting to hold their first hybrid investor conference by October and 2/3rds by the end of the year. Going forward, hybrid formats for investor conferences are expected to be the new normal, with 70% of 2022 events and 58% of 2023 events expected to have both physical and virtual components.
According to this Reuters article, the NY AG is preparing to file an insider trading lawsuit against Eastman Kodak and its CEO. The allegations arose out of last summer’s debacle surrounding insider transactions in Kodak stock in advance of the announcement of a potentially transformational new loan from the federal government. Here’s an excerpt from the Reuters piece:
The New York attorney general’s office is preparing an insider-trading lawsuit against Eastman Kodak Co and its top executive, focusing on stock purchases that preceded an ill-fated deal with the Trump administration to finance a pharmaceutical venture during the COVID-19 pandemic, according to the company and people familiar with the matter.
The emerging civil case centers on Executive Chairman Jim Continenza’s June 23, 2020, purchase of nearly 47,000 Kodak shares, Kodak said in a quarterly Securities and Exchange Commission filing on Monday. Continenza, the company chairman starting in September 2013 and executive chairman since February 2019, took on the additional role of CEO in July 2020.
The trades occurred weeks before the Trump administration unveiled a tentative agreement to lend the company $765 million backing production of pharmaceutical components for help fighting the pandemic. Kodak’s stock experienced a roller coaster following the late-July announcement, skyrocketing more than 1,000% before falling.
As Lynn blogged last September, a report by independent counsel retained by a Kodak special committee concluded, among other things, that the company’s CEO did not trade while in possession of MNPI (see the discussion beginning at p. 36). Among other things, the report noted that the CEO traded during an open window, and pre-cleared his trades with the company’s GC, who indicated that he didn’t believe that discussions about the potential loan had risen to the level of MNPI at the time of the CEO’s transactions.
That combination of factors would appear to make it difficult to satisfy Rule 10b-5’s scienter requirement, but that’s not a problem for NY AG Letitia James. She has the Martin Act at her disposal – and there’s no need to prove scienter for civil or even misdemeanor criminal securities fraud claims under that nightmare of a statute.
As I’ve mentioned before, I grew up in Rochester, NY, and the parade of negative news about our fallen giant over the past several decades depresses me more than anybody who didn’t grow up there can begin to imagine. I remember how things used to be with Kodak, and it’s fair to say that I have a sentimental attachment to this company. As somebody once put it, “nostalgia – it’s delicate, but potent.”
Update: Here’s a statement on the matter I received from a spokesperson for Kodak:
“The Attorney General has threatened to file a lawsuit premised on an unprecedented and novel application of insider trading law that seeks to impose liability in the absence of evidence of intent. The threatened litigation would not be supported by legal precedent or the facts. Mr. Continenza did not engage in insider trading. He was not in possession of material non-public information when he made the trade at issue, and his small stock purchase fully complied with Kodak’s insider trading policies, was pre-approved by Kodak’s General Counsel, and was subsequently found to be compliant by outside counsel in an independent investigation. Importantly, Mr. Continenza has bought Kodak stock in virtually every open window period – and has never sold a single share. As we understand the Attorney General’s theory, the contemplated lawsuit would have a chilling effect on directors and executives of every public company, who could never invest in their own companies without fear of having good-faith decisions, pre-approved by counsel, second-guessed by regulators and charged as violations of law.”
PPP Fraud: Down the Shore, Everything’s Not Alright
Another place to which I have a pretty deep attachment is New Jersey. I was born there, still have lots of family there, and have been going “down the shore” for summer vacations on Long Beach Island for as long as I can remember. But it turns out – with apologies to Tom Waits – that down the shore, everything’s not alright. In fact, according to this ProPublica article, my favorite vacation spot is a target of opportunity for PPP fraudsters:
The shoreline communities of Ocean County, New Jersey, are a summertime getaway for throngs of urbanites, lined with vacation homes and ice cream parlors. Not exactly pastoral — which is odd, considering dozens of Paycheck Protection Program loans to supposed farms that flowed into the beach towns last year.
As the first round of the federal government’s relief program for small businesses wound down last summer, “Ritter Wheat Club” and “Deely Nuts,” ostensibly a wheat farm and a tree nut farm, each got $20,833, the maximum amount available for sole proprietorships. “Tomato Cramber,” up the coast in Brielle, got $12,739, while “Seaweed Bleiman” in Manahawkin got $19,957.
None of these entities exist in New Jersey’s business records, and the owners of the homes at which they are purportedly located expressed surprise when contacted by ProPublica. One entity categorized as a cattle ranch, “Beefy King,” was registered in PPP records to the home address of Joe Mancini, the mayor of Long Beach Township.
“There’s no farming here: We’re a sandbar, for Christ’s sake,” said Mancini, reached by telephone. Mancini said that he had no cows at his home, just three dogs.
Anyway, much of the problems arose out of loans initiated by an online lender, Kabbage, and the article says that they’re in large part the result of the program’s efforts to shove money out the door as quickly as possible during the height of the pandemic’s economic impact. The bottom line is that this is yet another data point indicating that there’s going to be quite a mess to clean up over the next several years.
More on “Corporate Governance Gaming”: ESG Crusaders or Gritty Gadflies?
Last Friday, Liz blogged about the potential shareholder voting implications of the “gamification” of the stock market. She noted a forthcoming study that suggests the new Gen Z & Millennial investors who’ve recently entered the market might coalesce around ESG issues and drive greater corporate accountability. Liz expressed some skepticism about this potential outcome. Given what usually happens when the Internet gets its hands on anything, I’m downright dubious.
For example, remember when the British government decided to let the Internet name a new research ship, and ended up – hilariously – with “Boaty McBoatface”? How about when PepsiCo decided to hold an online “Dub the Dew” contest to let the Internet come up with a name for a new flavor of Mountain Dew? The top choices were “Hitler Did Nothing Wrong” and “Diabeetus.”
The bottom line is that “gamers gonna game,” and that on the Internet, the anarchy is the point. My guess is that with the meme stocks crowd, we’re more likely to see a push to elect Gritty to GameStop’s board than we are to see a push for a socially conscious ESG agenda.
If you follow the SEC’s social media accounts, you know that almost anything the agency or commissioners post on any topic receives a deluge of responses from crypto fans ranting about the SEC’s enforcement actions targeting digital assets. Regardless of the merits of those rants, a recent Cornerstone Research report shows that the SEC has brought quite a few crypto-related enforcement actions over the years. Here are some of the highlights:
– Through December 31, 2020, the SEC has brought 75 enforcement actions and issued 19 trading suspension orders against digital asset market participants
– More than 70% of the SEC’s actions involved allegations of unregistered securities offerings, while 58% of its cases involved allegations of unregistered offerings combined with fraud. Over half (52%) of the actions involved unregistered securities offering allegations relating to ICOs.
– Other allegations include failure to register as a broker or an exchange, failure to register swap offerings to non-eligible contract participants, and failure to disclosure promoter compensation.
– 43 enforcement actions were initiated in federal court, while 32 were brought as SEC administrative proceedings. Of the 43 federal court cases, 34 involved a mix of individuals and firms as defendants. In seven cases, the defendants were individuals only, while two cases involved firms only. In 19 of the 32 administrative proceedings, the respondents were firms only. The SEC charged individuals only in six actions, or a mix of individual and firms in seven actions.
Many involved in the digital asset space have speculated that the SEC might be a more crypto-friendly environment with Gary Gensler as chair, under the assumption that his greater understanding of crypto would lead to a lighter regulatory touch. Based on his recent statements, however, while his tenure may see a push for greater clarity when it comes to regulation of digital assets as securities, that doesn’t necessarily translate into a “light touch.”
Staff Comments: “Hey, Where’s Your Earnings Release 8-K?”
For most companies, furnishing an Item 2.02 Form 8-K is a routine part of the earnings release process. But in a recent comment letter to CSW Industrials on its 2020 Form 10-K, the Staff noted that it had seen earnings releases on the company’s website, but that the company had not furnished any Item 2.02 8-Ks. Naturally, the Staff’s comment was “please tell us why you have not furnished these earnings releases under Item 2.02 of Form 8-K.” The company’s response was interesting. Here’s an excerpt:
For many years, the Company has issued earnings releases related to completed fiscal periods after the Company has filed with the SEC its Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K relating to such fiscal periods. Further, the Company believes, based on reviews performed as part of the Company’s disclosure control procedures, that its earnings releases report substantially the same information contained in the applicable Form 10-Q or Form 10-K filings and have not disclosed any additional material non-public information related to the applicable completed fiscal period.
As a result, the company said that it “has not been required to furnish such earnings releases under Item 2.02(a) of Form 8-K.” After the Staff raised a further comment questioning whether certain disclosure in the earnings releases was contained in the company’s periodic reports, the company responded by pointing to the relevant language in those reports. The Staff did not comment further.
Risk Factor Disclosures: Before & After
Last year, the SEC adoptedamendments to Item 101, 103 & 105 of Regulation S-K. The amendments were effective in November, and this recent SEC Institute blog reports how one company responded to the changes to Item 105’s risk factor disclosure requirements in its recent Form 10-K filing. Here’s an excerpt:
In Lumen Technologies’ Form 10-K for the year-ended December 31, 2019, risk factors are on pages 20 to 48, 28 pages long. Risks described range from “Risks Affecting Our Business” to “Other Risks.” It would be fair to say that some of the risk factors, such as “We may not be able to compete successfully against current and future competitors” might be “risks that could apply generically to any registrant or any offering.”
After implementing the new disclosure requirements, and a major amount of work, in Lumen Technologies’ Form 10-K for the year ended December 31, 2020, risk factors are on pages 21 to 32. This is a reduction from 28 to 11 pages! The revised disclosures start with “Business Risks,” a simpler and more direct heading, and finish with “General Risks” as required by the new rule. Interestingly, the General Risks are less than one page. Competitive issues are addressed in a more tailored risk factor titled “We operate in an intensely competitive industry and existing and future competitive pressures could harm our performance.”
The blog quotes Associate GC David Hamm as saying that the company used the amendments to “take a fresh look” at its risk factor disclosure, which resulted in a more direct and more investor-friendly presentation.
