According to this Audit Analytics blog, the number of Staff comment letters declined sharply in 2021, but those that were issued generated a lot of back & forth between issuers and the Staff. Audit Analytics calls this back & forth a “conversation” and says that the number of letters per conversation rose to its highest level in the past five years, suggesting that the SEC is scrutinizing responses more closely than in recent years. Not surprisingly, Audit Analytics says this was particularly true with regard to climate change comments – each of those conversations involved more than one comment letter.
The top areas that generated Staff comment have remained relatively constant over the past five years. In 2021, MD&A led the way (31% of comment letters), followed closely by Non-GAAP (27%). 8-K disclosures (10%), segment reporting (9%) and revenue recognition (8%).
This Goodwin blog reminds 12/31 year-end filers that although they had to comply with the SEC’s 2020 MD&A amendments in their Form 10-K, this quarter’s 10-Q will be the first quarterly filing in which compliance with those rule changes will be required. This excerpt highlights some of the more important aspects of the new rules that companies will need to keep in mind:
Two of the newly required MD&A amendments are of particular significance: (1) the alternative interim period comparison and related disclosure requirements and (2) the new critical accounting estimates disclosure requirements. Very briefly, the critical points include the following.
– Interim period comparisons may be presented for sequential preceding periods rather than prior year periods, which was the only option prior to the 2020 financial disclosure amendments. If the company chooses to present a comparison of sequentially preceding periods, the amendments require additional disclosure, as set forth in Item 303(c) of Regulation S-K.
– Critical accounting estimates are now formally required by Item 303(b)(3) of Regulation S-K. An instruction explicitly states that this disclosure should not merely duplicate the accounting policies presented in the financial statement notes, which has been the practice of many companies under the guidance that applied prior to adoption of the amendments.
The blog also reminds filers to keep in mind the rising inflation and interest rate environment as they prepare the MD&A discussion for their first quarter 10-Qs. Goodwin has also put together this handy Form 10-Q Form Check Table that reflects the newly applicable line-item requirements as well as other topical matters that companies should consider addressing in their upcoming filings.
Earlier this week, the WSJ’s “Heard on the Street” column discussed the recent boom in stock splits. The column says that S&P 500 companies are implementing splits at the highest rate in the past 10 years. It also says that the traditional justification for a split – “democratizing access” to share ownership – doesn’t hold water in an age when retail investors can fractional shares through a variety of online trading platforms.
So what’s going on here? According to the WSJ, the stock split boom may well be the sequel to the “meme stock” craze of the last two years:
If the past few years brought the meme-stock craze, we may now be seeing a stock-split craze. Big money flooded freely into the tech sector in 2020 and early 2021 coincident with low Treasury yields. As tech stocks in particular have sold off in the past few months, companies are now having to work that much harder to make their shares stand out.
Indeed, the most important conclusion to the rise in stock splits this year, according to BofA’s investment and ETF strategist Jared Woodard, is the signal it is sending about the profound shift in management priorities “as the shareholders strike back.” Shopify has shed nearly 60% of its market value—worth some $100 billion—just this year, and even Amazon.com and Alphabet have lagged behind the S&P 500.
Within the S&P 500, BofA counted five stock-split announcements this year as of early last week—roughly the average annual number we have seen for companies in that index over the past five years. Assuming that pace continues, individual investors would be in a better position to take advantage of a total of about 18 stock splits from S&P 500 companies this year. And there could be far more than that: As of early February, 17% of the S&P 500 was trading above $500 a share, or 85 companies, BofA found.
After dutifully acknowledging that there’s no real financial impact from a stock split, the column goes on to discuss the pros and cons of a split, and it may make useful reading for a board that’s thinking about one. It also closes with a cautionary reminder that over the past four decades, the height of stock splits coincided with the dotcom boom, and that didn’t end very well.
Earlier this week, I blogged about Commissioner Peirce’s statement criticizing the SEC’s failure to act on a SPAC’s acceleration request for its Form S-4 registration statement. In that blog, I said that it was hard to assess the validity of her criticism, because the correspondence between the issuer and the Staff hadn’t been released yet. WilmerHale’s David Westenberg subsequently reached out to remind me that since the S-4 was not declared effective, the Staff will not publicly release the review correspondence, although it may be possible to obtain it with a FOIA request.
On her Twitter account, Olga Usvyatsky flagged a recent comment letter exchange between UPS & the Staff dealing with the potential impact of Russia’s invasion of Ukraine. The Staff’s comment focused on risk factor disclosure concerning the impact of changes in general economic conditions set forth on page 9 of the company’s Form 10-K. This excerpt from UPS’s response letter includes the Staff’s comment & the company’s response:
1.You refer to the adverse impact on your business due to geopolitical uncertainties and conflicts in the Russian Federation and Ukraine. Please describe the adverse impact of Russia’s invasion of the Ukraine on your business, including the impact on your operations and potential asset impairments.
Response to Comment 1:
The Company does not have any material business, operations or assets in Russia, Belarus or Ukraine, and has not been materially impacted by the actions of the Russian government. The Company’s total revenue from these three countries constitutes less than 1.0% of consolidated revenue.
As has been disclosed by the Company on its corporate website, www.ups.com, as a result of Russia’s invasion of Ukraine, the Company has temporarily suspended all shipping services to, from and within Ukraine, Belarus and Russia, until further notice. In addition, the Company has halted overflights of Russia, with no material impact on the Company’s costs.
If and when the actions of the Russian government are reasonably likely to materially impact the Company or its operations, the Company undertakes to include appropriate disclosures in its public filings.
The Staff had no further comments for UPS, but Olga’s tweet said that it was reasonable to assume other companies will be receiving similar comments. A quick search of the EDGAR database confirms that assumption was correct. A search for filing review correspondence containing the word “Ukraine” from 3/1 to 4/19 found two other issuers that had received publicly available comments relating to the Ukraine crisis. Here are links to response letters addressing Ukraine-related comments issued to ESAB Corp. and Teucrium Commodity Trust.
Yesterday’s NY Times contained an opinion piece from Adam Liptak discussing the First Amendment issues surrounding the SEC’s “neither admit nor deny” settlement policy. Liptak notes that a cert petition for review of a case challenging that policy has recently been filed with the SCOTUS. The case, Romeril v. SEC, involves a former Xerox executive’s efforts to obtain relief from a 2003 “neither admit nor deny” settlement with the SEC. In September 2021, the 2nd Circuit upheld the SDNY’s decision to deny the plaintiff’s motion for relief from judgment.
This excerpt from the cert petition’s “Questions Presented” section notes that the constitutional issues associated with the policy are front and center:
1. Does it violate the First Amendment for the Securities and Exchange Commission to impose a requirement that any party with whom it settles must agree to a lifelong prior restraint barring any statement, however truthful and whenever and however expressed, that even suggests that any allegation in a Securities and Exchange Commission Complaint is insupportable?
2. Does the Securities and Exchange Commission violate the Due Process Clause when it requires that any party with whom it settles must sign an SEC-drafted Consent Form waiving his due process rights and agree to a lifelong prior restraint barring any statement, however truthful and whenever and however expressed, that even suggests that any allegation in a Securities and Exchange Commission Complaint is insupportable?
Liptak notes that the Court grants very few petitions for cert, but that this one might have a shot because of the divergent approaches that lower courts have taken when it comes to gag orders imposed by the government. Okay, fair enough, but the cynic in me says there’s another reason the SCOTUS might take this case – given the present ideological makeup of the Court, there are likely several justices who wouldn’t mind the chance to bloody a federal agency’s nose when it comes to what they perceive as overreaching conduct.
Personally, I’ve come to really dislike the “neither admit nor deny” policy. I’ve seen situations where the agency has announced the filing of aggressive & career-damaging complaints on its website, only to settle for significantly less years later. To add insult to injury, the SEC routinely issues statements on its website trumpeting all of its settlements as victories, while the other parties can merely grit their teeth & hold their tongues.
The March-April issue of “The Corporate Counsel” newsletter is in the mail (email sales@ccrcorp.com to subscribe to this essential resource). It’s also available now online to members of TheCorporateCounsel.net who subscribe to the electronic format – an option that many people are taking advantage of in the “remote work” environment. This issue includes the following articles:
– SEC Proposes Breathtaking Climate Disclosure Rules
– A Long Road to Regulations: The SEC’s Cybersecurity Disclosure Proposals
– Beneficial Ownership in the Spotlight: The SEC Proposes Much Needed Reforms
Dave & I also have been doing a series of “Deep Dive with Dave” podcasts addressing the topics we’ve covered in recent issues. We’ll be posting one for this issue soon. Be sure to check it out on our “Podcasts” page!
It can happen to any public company – an executive is having a one-on-one with an investor or analyst, and inadvertently discloses a tidbit of information that may be material nonpublic information. If it is, then Reg FD requires the company to promptly disclose that information to the public. But what internal procedures should companies follow in determining whether they have a Reg FD issue? That’s the topic of this Woodruff Sawyer blog, which lays out three steps that a company that finds itself in this situation should take:
1. Avoid making premature conclusions. Many times, potential Regulation FD issues are flagged by non-lawyers that were present at a meeting where the authorized speaker disclosed nonpublic information. In some cases, the issue may be flagged by the authorized speaker. Individuals may naturally jump to conclusions as to the character of disclosure. That should be avoided. Best practice for these individuals is to limit internal discussions and communications—particularly if they are in writing—regarding a potential Regulation FD disclosure issue to the particular facts and leave legal assessments to legal counsel.
2. Immediately contact legal counsel. A materiality determination will generally require, among other things, that counsel consult with other functions/departments within the company to assess whether the authorized speaker has in fact inadvertently disclosed material nonpublic information. This can take time—something the company doesn’t have much of. Remember, a company must publicly disclose material nonpublic information following an unintentional selective disclosure of that information before the later of (a) 24 hours or (b) the beginning of the next day’s trading on the New York Stock Exchange (NYSE). As a result, it is imperative that counsel have as much runway to assess the issue. If public disclosure is determined to be required, counsel will need to help to prepare that disclosure along with other internal stakeholders, which may be management, investor relations and finance.
3. Make certain that relevant internal stakeholders are involved, updated as to developments and made aware of the outcome. Ideally, a company will have already identified the team that should be involved in reviewing Regulation FD related issues before having to put up the Bat-Signal. At a minimum, that team should include in-house counsel, investor relations, and finance.
This third point is critical because if the disclosure results in stock price movements, the company may receive inquiries from analysts, investors, stock exchanges & the SEC. Since no single function will be on the receiving end of all of those inquiries, it’s important to involve all relevant internal stakeholders to ensure there are no information gaps.
After I posted this, a member reached out to us with the following comment, and it’s a good one: “Also, no one should trade until the situation is worked out. Insider trading while material information has been disclosed only selectively, creates additional issues for the traders, putative tipper(s) and the issuer.”
Twitter has been a great source of DealLawyers.com blogs this week, but the bird app also was recently involved in some litigation of interest to securities & capital markets lawyers. The 10b-5 Daily points out that last month, the 9th Circuit held that Twitter did not have a duty to update statements about its product development efforts. This excerpt summarizes the facts of the case and the Court’s decision:
In Weston Family Partnership LLP v. Twitter, 2022 WL 853252 (9th Cir. March 23, 2022), the plaintiffs alleged that Twitter had misled investors about problems with its Mobile App Promotion (MAP) product. In August 2019, Twitter announced that software bugs in the MAP product had caused the sharing of the cell phone location data of its users and that it had “fixed these issues.” Several months later, the company disclosed that software bugs continued to exist and reported a $25 million revenue shortfall.
The district court dismissed the claims. On appeal, the Ninth Circuit found that “fixed these issues” referred to no longer sharing the cell phone location data, not the software bugs. Moreover, Twitter had no duty to update investors about the progress of its MAP product and the plaintiffs had not plausibly alleged that the software bugs had materialized and impacted revenue prior to August 2019.
The Court’s language on the duty to update is likely to find its way into countless future briefs:
Plaintiffs suggest that Twitter—when faced with a setback in dealing with software bugs plaguing its MAP program—had a legal duty to disclose it to the investing public. Not so. While society may have become accustomed to being instantly in the loop about the latest news (thanks in part to Twitter), our securities laws do not impose a similar requirement. Section 10(b) and Rule 10b-5 “do not create an affirmative duty to disclose any and all material information.” Matrixx, 563 U.S. at 44.
Put another way, companies do not have an obligation to offer an instantaneous update of every internal development, especially when it involves the oft-tortuous path of product development. See Vantive, 283 F.3d at 1085 (“If the challenged statement is not false or misleading, it does not become actionable merely because it is incomplete.”). Indeed, to do so would inject instability into the securities market, as stocks may wildly gyrate based on even fleeting developments. A company must disclose a negative internal development only if its omission would make other statements materially misleading.
Stan Keller’s “Integration of Public and Private Offerings” outline has long been the go-to resource for lawyers trying to work their way through integration issues in securities transactions. Stan recently updated his outline and was kind enough to provide a copy to us, which we’ve posted in our “Integration” Practice Area. If you’re not familiar with it – well, you must be new here!
The outline focuses on SEC rules and interpretations that relate to the integration of private and public offerings and how they affect the capital formation process. Importantly, the outline also reviews the SEC’s approach to integration of offerings generally as it has evolved to date, including the major changes that became effective in March 2021. It remains a terrific resource and one you should definitely keep close at hand.
