The SEC has been pretty active over the past year in adopting new disclosure requirements, many of which companies are going to be required to comply with in their Form 10-Q and Form 10-K filings over the course of the next year. This Weil memo identifies these new disclosures, provides a snapshot of the compliance dates for calendar year end companies, and offers some guidance on how to prepare to comply with them. Not surprisingly, the memo’s recommendations focus on the need for companies to take a hard look at their disclosure controls and procedures:
Companies should confirm that disclosure controls and procedures have been updated and evaluated as they prepare to meet the timely disclosure of information required by the new rules. Companies also should be reviewing and updating various policies that will be required to be either filed or described publicly for the first time, such as the company’s insider trading policy, share repurchase processes and procedures, and cybersecurity risk management, strategy, and governance
The memo goes on to identify some specific actions that companies should take regarding their disclosure controls and procedures for each of these new disclosure mandates, if they haven’t already done so.
Like most Americans, I have a soft spot in my head heart for conspiracy theories. Generally, the kookier they are, the more intriguing I find them to be. But I’ve got to admit that I’m having a hard time buying into one that the Chair of the House Oversight Committee, Rep. James Comer (R-KY), appears to be peddling. Check out this excerpt from a recent letter he wrote scolding SEC Chair Gary Gensler for dragging his feet in complying with Republican legislators’ demand for information about the SEC’s efforts to coordinate with EU regulators:
Senator Tim Scott and I wrote you on June 5, 2023, seeking documents and information on your agency’s involvement in the development of European social engineering initiatives disguised as disclosure and due diligence directives being developed by the European Union (EU). This Administration has hidden behind “interoperability of disclosure regimes” as its justification for global coordination. However, it is not clear that the law provides such authority and we must determine whether legislation is necessary to ensure our government works for the American taxpayer and not on behalf of foreign interests.
So, the distinguished gentleman & his Senate colleague are apparently concerned that the SEC may be conspiring with the EU to engage in a “social engineering initiative disguised as disclosure”? Well, I suppose Gary Gensler could be part of a globalist conspiracy to deprive us of our liberty, destroy our economy, make us trade in in our F-150s for electric Vespas & force us to watch soccer instead of the NFL.
On the other hand, given the US reluctance to embrace concepts like “double materiality” when it comes to financial regulation, the simpler explanation may be that the SEC’s efforts to coordinate with the EU have been motivated in part by a desire to prevent regulators there from implementing disclosure standards that the US will find unacceptable. Personally, in choosing between the two alternative explanations, I’d opt for the one that conforms with “Occam’s razor.”
As Meredith blogged back in August, disclosures concerning the impact of inflation have been getting increased attention in Staff comment letters. Now, it looks like plaintiffs’ lawyers are scrutinizing those disclosures pretty closely as well. Over on “The D&O Diary,” blog Kevin LaCroix recently blogged about a purported class action lawsuit filed against Advance Auto Parts last week premised on alleged shortcomings in the company’s disclosure about the impact of inflation and other macroeconomic factors on its business. This excerpt highlights the statements that gave rise to the lawsuit:
On November 16, 2022, in its quarterly earnings call, the company announced its “strategic pricing initiatives” aimed to help grow margins in 2023. The company’s CEO said that “our goal overall is to cover cost increases.” The CEO said that these initiatives were based on the company’s research showing that in the professional category, availability rather than prices was the more important factor in sales.
On its quarterly earnings call on February 28, 2023, the company said that it was continuing to execute “disciplined inventory and pricing actions.” During the call, the company’s CEO dismissed the impact of the U.S. economy and other macroeconomic factors on sales and margins. While acknowledging that the company remains “cautious surrounding the macroeconomic backdrop, including with respect to the pressure on low-to-middle income consumers,” the CEO confirmed the company’s 2023 guidance.
However, in its quarterly earnings call on May 31, 2023, the CEO said that “our financial results in the first quarter were well below expectations, noting that the company’s pricing initiatives produced “less price realization than plans,” and that the company had been “unable to price to cover product costs in the quarter.”
In their lawsuit, the plaintiffs allege that the company’s statements violated Rule 10b-5. They contend, among other things, that these statements misrepresented the efficacy of the company’s strategic pricing initiative and “created the false impression that inflation and macroeconomic factors had an insubstantial impact on the Company’s margins.”
Kevin addresses the issues likely to be raised by the company in its motion to dismiss and seems to think the plaintiffs may face an uphill battle to establish that the statements at issue were made with scienter. But he also points out that as companies continue to face economic headwinds associated with inflation and higher interest rates, more of them may face lawsuits like this one.
The PCAOB recently released its annual report on conversations with audit committee chairs. This FEI Daily blog highlights what that report has to say about the five biggest worries facing audit committee chairs. This excerpt says one of them is shortcomings in communications between auditors and audit committees:
A large number of audit committee chairs interviewed by the PCAOB cited “inconsistent or last-minute communication with auditors” as a growing issue and that the area needed improvement. While those leaders said that the auditor’s overall approach to communication in areas like emerging issues and education should be commended, they added there was room for improvement in audit status updates. “Audit committee chairs felt that early and ongoing communication with their auditors would help minimize the possibility of surprises throughout the audit,” the report states.
Other areas of concern include the impact of the “great resignation” on the accounting profession, the ongoing control challenges of a remote workforce, the need to prevent the determination of “Critical Audit Matters” from becoming a generic compliance exercise, and the accuracy of non-GAAP and other non-financial statement metrics.
On Friday, the SEC adopted a pair of rules mandated by Dodd-Frank & intended to enhance market transparency when it comes to short positions & securities lending activities. The SEC first announced the adoption of Rule 10c-1a, which will require certain persons to report information about securities loans to a registered national securities association and in turn require that association to make publicly available specified information about those loans. Here’s the 353-page adopting release and the 2-page fact sheet. This excerpt from the fact sheet explains why the new rule matters:
Parties to securities lending transactions are not currently required to report the material terms of those transactions. The lack of public information and data gaps create inefficiencies in the securities lending market and make it difficult for borrowers and lenders to ascertain – and to know whether the terms of their loans are consistent with – market conditions. Rule 10c-1a will provide market participants with access to pricing and other material information regarding securities lending transactions in a timely manner. Further, the rule will provide regulators with information for their market oversight functions.
The SEC then announced the adoption of Rule 13f-2, which is intended to increase the public availability of information about short sale activity. Here’s the 315-page adopting release and here’s the 2-page fact sheet. This excerpt from the fact sheet explains why this new rule matters:
Section 13(f)(2) of the Securities Exchange Act of 1934 (“Exchange Act”), added under Section 929X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires the Commission to prescribe rules to make certain short sale related data publicly available. The data reported in Form SHO filings and the aggregated data from Form SHO filings that are published by the Commission pursuant to Rule 13f-2 will among other things, help inform market participants regarding the overall short sale activity by reporting Managers and will bolster the Commission’s and other regulators’ oversight of short selling.
The rules were adopted by the now customary 3-2 party line vote. The new rules may increase the transparency of short activity & securities lending – which typically go hand in hand – but as the WSJ points out, the final rules don’t require disclosure of the kind of granular information that could compromise the anonymity of hedge fund short sellers. I guess that means that the downtrodden stocks of corporate America will still need to pin their hopes from time-to-time on the intervention of the Dumb Money crowd for relief from short sellers’ depredations. For some of these companies, the meme stock folks may not be the heroes they need, but they’re almost always the ones they deserve.
The disclosure implications of the horrific terrorist attacks on Israel & the war that those attacks spawned are rightfully pretty far down the list of concerns raised by those events, but they are nevertheless something that public companies and those who advise them must keep in mind. This recent Goodwin blog addresses those implications, and points out that the Staff’s prior guidance concerning the implications of Russia’s invasion of Ukraine provides some insights about what the SEC is likely to expect from public companies impacted by the current hostilities in the Middle East:
Given the recency of the War, the Securities and Exchange Commission’s (the “SEC”) Division of Corporation Finance is yet to provide specific disclosure guidance related to the War. For context,when the geopolitical situation in Eastern Europe intensified in February 2022, with Russia’s invasion of Ukraine, the Securities and Exchange Commission’s (the “SEC”) Division of Corporation Finance released a sample letter reflecting comments it may issue to a registrant regarding compliance withthe SEC’s disclosure obligations.
The sample letter underscores the need for registrants to evaluate both direct and indirect impacts of wars, including potential or actual disruptions to suppliers, customers, or employees, among other considerations. The sample comments within the letter primarily focus on (1) risk factors, (2) Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), (3) internal control over financial reporting, (4) disclosure controls and procedures, and (5) non-GAAP measures.
The blog points out the importance of considering a company’s direct and indirect exposures to the impact of the conflict, particularly for those companies with material business ties to the region and those that lend to or borrow from entities in Israel or Gaza. It also notes that the war may impact an even wider range of public companies given its potential ramifications for the global economy and financial markets.
The comment period for the PCAOB’s controversial “NOCLAR” proposal expired in August, and that means the big question is “what happens now?” This Bass Berry blog has some thoughts on the answer to that question:
Now that the comment period has closed, the PCAOB will determine whether or not to adopt final rules and whether or not the final rules will make changes to the Proposal. Any final rules adopted will be submitted to the Securities and Exchange Commission (SEC) for approval. Pursuant to Section 107 of the Sarbanes-Oxley Act, proposed rules of the PCAOB do not take effect unless approved by the SEC.
Given that the Proposal has majority support at the PCAOB and that even the two dissenting members expressed support for certain aspects of the Proposal, we expect any final rules submitted to the SEC for approval to expand auditors’ responsibilities with respect to NOCLAR. In the meantime, the PCAOB’s clear focus on NOCLAR might cause auditors to be more demanding with respect to these matters, even under the current standard.
The blog recommends that companies reevaluate their existing legal compliance policies and procedures, consider how their audit committee will evaluate information that auditors may provide about potential non-compliance with laws and regulations and how the company will respond for requests from auditors dealing with non-compliance, particularly if the information sought is privileged.
We are wrapping up Conference week! Today is our “20th Annual Executive Compensation Conference” – Wednesday & Thursday were our “2023 Proxy Disclosure Conference.” Both conferences are paired together, and they’ll also be archived for attendees until next September. Here’s more info for people who are attending:
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform, then follow the “Proxy Disclosure/Exec Comp” tab to see the agenda for today, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please use the Help Desk tab on the left side of the conference platform for support or email our Operations Manager, Victoria Newton at VNewton@CCRcorp.com. If you have any other questions about accessing the conference, please email our Operations Manager, Victoria Newton (vnewton@ccrcorp.com).
– How to Watch Archives & Access Transcripts: If you registered to attend the Conference through CCRcorp, you will be able to access the conference archives on the conference platform next week, and unedited transcripts will be available beginning about 1-2 weeks after the event. If you registered for the conferences through NASPP, you will receive access to the video archives from NASPP. Archives and transcripts will be available on-demand until September 20, 2024, so they’ll be available for you to reference as you navigate challenging proxy season issues well after the live Conferences have concluded.
– How to Earn CLE for Live Sessions: We are applying for up to 16 hours of CLE credit for the Proxy Disclosure & Executive Compensation Conferences in applicable states – approvals of actual credit vary based on each state. Please read these CLE FAQs carefully to confirm that your jurisdiction allows CLE credit for online programs. You will need to respond to periodic prompts approximately every 20-30 minutes during the conference to attest that you are present. After the conference, you will receive an email with a link. Please complete the link with your state license information. Our CLE provider will process CLE credits to your state bar and also send a CLE certificate to your attention within 30 days of the conference.
– New this Year! On-Demand CLE: We will be offering on-demand CLE credit for the session replays, in states where that is available. There are some nuances to receiving that credit, so make sure to check out the on-demand CLE FAQs that follow the general CLE FAQs in order to be able to take advantage of that.
– Thanks To Our Sponsors! Thank you to our gold sponsors, Fredrikson and Morrison Foerster, our silver sponsor, Kirkland & Ellis, and our media partner, Newsfile! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Please visit their pages!
It is not too late to register for our Conferences today! You can sign up for today’s “20th Annual Executive Compensation Disclosure Conference” by emailing sales@ccrcorp.com or by calling 1-800-737-1271. If you miss these conferences or our “2023 Practical ESG Conference,” you can still purchase access to the archives (and, for the “2023 Proxy Disclosure & 20th Annual Executive Compensation Conferences,” may be able to earn CLE credit for watching on-demand sessions as well). Just email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that.
Earlier this week on his Section16.net blog, Alan Dye pointed out that the Senate recently passed legislation that would create a lot of headaches for foreign private issuers:
The Senate-passed National Defense Authorization Act for Fiscal Year 2024 contains a provision (Section 6081) that would amend Section 16(a)(1) of the Exchange Act to subject insiders of foreign private issuers to Section 16 and render null and void any SEC rule exempting them from Section 16. If enacted, the amendment would partially nullify Rule 3a12-3, which provides that securities of FPIs are not subject to Section 16 and parts of Section 14. I don’t know who is behind the amendment, but I will try to find out.
Weil’s Howard Dicker subsequently provided us with the information that Alan was looking for. It turns out that a stand-alone bill removing the Section 16 exemption for FPIs was introduced in the Senate back in April 2023. That legislation was co-sponsored by Sen. John Kennedy (R-LA) and Sen. Chris Van Hollen (D-MD), both of whom co-sponsored an identically worded bill the prior year. Then, in July 2023, those co-sponsors offered the same text as an amendment to the National Defense Authorization Act.
When they introduced the stand-alone bill, the co-sponsors issued a press release describing their reasons for the proposed legislation. Here’s an excerpt:
“Insiders at companies in Beijing and Moscow have been able to avoid billions in losses on the U.S. stock exchange by playing by a different set of rules than Americans do. This insider trading comes at a cost to American investors. The Holding Foreign Insiders Accountable Act will help stop opportunistic insider trading by requiring foreign executives to disclose trades immediately,” said Kennedy.
“All companies operating on U.S. markets should have to play by the same rules. And when corporate insiders sell their stocks, investors and the American public have a right to know. It’s time to require foreign executives to disclose these trades and provide this information to the public,” said Van Hollen.
I appreciate the rationale behind the proposed amendment, and the co-sponsors’ commentary on the bill suggests that their focus is on Section 16(a) reporting. But as written, it looks like the amendment would also subject FPI insiders to the short-swing profit recovery provisions of Section 16(b) – and that’s something I think legislators ought to think long and hard about before they enshrine it into law.
It’s one thing to require companies that want to enjoy the privilege of a US listing to be required to publicly disclose insider trades on a timely basis, but it’s another to expose foreign company insiders to potential liability under a draconian statutory relic that’s a notorious trap for the unwary. Subjecting FPI insiders to Section 16(b) will create a pretty strong disincentive for the folks who call the shots at foreign companies to list their shares here. And we do still want them to do that, right?
Until recently, when a company ran into potential trouble with the SEC or another regulator, it usually made only the blandest of statements in its own defense if it commented at all. But these days, it’s becoming increasingly fashionable for companies to take their case to the court of public opinion and to bash their regulators as part of that strategy. Here’s an excerpt from this Axios newsletter:
As Axios’ Crystal Kim recently pointed out in her crypto newsletter, most companies clam up when the Securities and Exchange Commission (SEC) comes knocking, but that’s not the approach Coinbase Global is taking.
Zoom in: Coinbase has been unusually vocal about run-ins with its primary regulator in blogs, tweets, podcasts and media interviews — offering up subpoenas, court filings (theirs and their adversaries) and legal analysis in near real time to the public.
Coinbase also started an advocacy campaign called Stand With Crypto seeking to mobilize public support for crypto rules. “In terms of how we thought about public messaging, we needed to start with first principles to basically reconsider anything and everything we had been taught about how to engage,” Paul Grewal, Coinbase’s chief legal officer, told Kim.
Zoom out: Coinbase isn’t alone. Activision Blizzard and Airbnb haven’t pulled punches in their battles with regulators, while DoorDash and Oatly have pushed back hard against misinformation or public critiques. “There are advantages in speaking out and creating a public issue, so others can be aware and support the defense,” Junaid Zubairi, an attorney at Vedder Price, told Axios.
I guess I can understand why companies dealing with a potentially existential regulatory issue might decide to take a scorched earth approach, but at the risk of provoking an “okay boomer” response from many of our readers, I don’t see the long-term upside of spewing vitriol at a regulator that a company is going to have to deal with on a regular basis for the foreseeable future.
