A couple of years ago, Corp Fin initiated a policy under which some Rule 14a-8 no-action requests received an oral response only. Yesterday, Corp Fin announced that it was discontinuing that policy. Here’s an excerpt:
We have reconsidered this approach, and after review of the practice we believe that written responses will provide greater transparency and certainty to shareholder proponents and companies alike. Beginning with the publication of this announcement, we will return to our prior practice and the staff will once again respond to each shareholder proposal no-action request with a written letter, similar to those issued in prior years. Our response letters will be posted publicly on the Division’s website in a timely manner. We will no longer communicate our responses via a chart, but we expect to publish a chart upon completion of the proxy season.
The original decision to provide oral responses to some letters was prompted in part by Corp Fin’s desire to enhance the efficiency of the no-action process, but my guess is that this change in policy is likely to have the opposite effect. At the very least, it isn’t going to ease the burden on the Staff when it comes to processing no-action requests – which may well spike this year as a result of Corp Fin’s issuance of SLB 14L.
In advance of tomorrow’s open meeting at which the SEC is likely to propose rule amendments addressing, among other things, 10b5-1 plans and issuer buybacks, commissioners Peirce & Roisman issued a joint statement criticizing Chair Gensler’s rulemaking agenda. In particular, the statement says that the decision to revisit rules that were only recently adopted undermines precedent:
The Agenda makes plenty of room for rulemakings to undo rulemakings that the Commission only recently completed. These include proposals to further amend our rules on proxy solicitation and shareholder proposals; the Resource Extraction Payments Rule; the rules pertaining to the accredited investor definition and the private offering exemption integration framework; as well as our whistleblower rules. Not only are the Commission’s most recent amendments to each of these rules barely or less than a year old; none have been effective for more than a few months. As we said when we initially raised these concerns, we have not seen any new information that would warrant opening up any of these rules for further changes at this time. So, why the rush to revisit them?
Hmm, I wonder if this decision to revisit prior rulemaking has anything to do with the fact that the SEC adopted each of the rules that the current regime proposes to reconsider by a 3-2 vote along partisan lines? That’s a reflection of how politicized the SEC rulemaking process has become over the course of the past couple of decades, and is something for which both sides bear responsibility.
In this environment, statements from commissioners calling into question one side’s agenda for failing to respect “precedent” that the other side crammed down their throats aren’t going to persuade anyone who doesn’t already agree with them.
The November-December issue of “The Corporate Counsel” newsletter is in the mail. 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 (subscribe here to be “in the know”). The issue includes articles on:
– Annual Season Items
– SEC Adopts Mandatory Use of Universal Proxy in Contested Elections
– Staff Legal Bulletin 14L: Corp Fin Lays Out the Welcome Mat for ESG-Related Shareholder Proposals
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!
Liz has already blogged a couple of times (here’s the most recent) about Acting Chief Accountant Paul Munter’s statement recapping the OCA’s 2021 activities. For a blogger, this thing is one of those “gifts that keep on giving”, so I’m going to address another issue he raised – “Little r” restatements. Munter noted that Little r restatements have grown from 35% of restatements in 2005 to nearly 76% last year. Since they don’t require companies to restate prior period financials in order to correct an error, it’s easy to understand their popularity. But that rise in their use seems to have also attracted more attention from the SEC.
The ability to correct an error without a full-blown restatement depends on whether the error is material to the prior period, but Paul Munter cautioned that deciding whether an error is material is not a mechanical process. Instead, “management must judiciously evaluate the total mix of information, taking into consideration both quantitative and qualitative factors to determine whether an error is material to investors and other users.”
Shortly after this statement was issued, Corp Fin’s representatives at the annual AICPA & CIMA conference suggested that qualitative factors aside, some errors are just quantitatively too big to “Little r.” This excerpt from a Wolters Kluwer blog on the conference explains:
Corp Fin indicated that the guidance in SAB 99, Materiality, remains guidance and requires quantitative and qualitative considerations when determining if something is material to a reasonable investor. Corp Fin discussed two recent accounting error examples in which the division did not agree to the Little r treatment by the particular company. In both cases, Corp Fin asked for SAB 99 considerations and judgments to gauge how the company determined that the particular errors did require Big r restatement and withdrawal of the audit opinion. In the two examples, quantitative factors were significant (i.e., 20% change in net income, 50% change in loss on discontinued operations). However, in the company’s SAB 99 analysis it relied on qualitative factors to overcome these significant quantitative factors. Some of the qualitative factors considered by the company included that the:
– Error generally was isolated to the discontinued operations portion of the financial statements;
– Error was already now corrected since it was revised (not restated).
– The sale was complete;
– The most recent financial statements really are the ones that are most useful to investors.
Corp Fin appreciated the qualitative factors and they are things that it sees generally with SAB 99 analysis. As a result, Corp Fin did not necessarily disagree that these qualitative factors weren’t relevant. However, Corp Fin determined that these qualitative factors were not enough to overcome the magnitude of the quantitative errors.
The blog also says that Corp Fin’s representatives pointed out that a lot of the qualitative considerations raised here were based on the passage of time – in other words, a lot of water has gone under the bridge since the error, and that makes it immaterial. Not surprisingly, those type of qualitative arguments don’t carry a lot of weight with the Staff.
I think it’s fair to say that when issues surrounding Little r restatement decisions feature in both an Acting Chief Accountant’s statement on current areas of focus & in remarks by Corp Fin representatives at a prominent conference, those issues are front and center with the SEC’s accountants. So, if you’ve got a client that wants to correct an error through a Little r restatement, it’s probably a good idea to tell them that they’d better be loaded for bear – and not just in case the Staff comments on the filing. With this level of SEC attention, auditors are likely going to require a lot of persuading before they sign off on a Little r restatement.
Now may a good time for calendar year companies to do a little housekeeping in advance of the post-holiday annual reporting rush. This Bryan Cave blog says that one item that should be on your agenda is a review of your corporate bylaws. This excerpt identifies some specific areas to take a look at:
– Calling of special meetings of shareholders – Consider the list of who has authority to call special meetings. Typically it includes the CEO and a majority of the board. A state may require that persons in certain positions or a specified percentage of shareholders have the authority to call a meeting. Inclusion of a minority of the board may create risks in the case of board dissent. Some companies permit a specified percentage of shareholders, with detailed informational and procedural requirements.
– Conduct of shareholder meeting – Sometimes overlooked, particularly in legacy bylaws, detailed authorizing provisions can clarify the authority of the board or a presiding officer as well as address questions of validity in light of the silence of many corporate statutes.
– Virtual shareholder meetings – Even where clearly permissible under corporate statutes, it may be prudent to affirm the permissibility of virtual meetings in bylaws as well.
– Notice of shareholder meetings – Although eproxies have been common for some time, consider whether notice provisions may need to be better aligned to the company’s practices.
– Advance notice provisions – If not updated recently, consider reviewing informational and procedural requirements for currency and to ensure they aren’t “overtly unreasonable.” If applicable, similarly review any special meeting or written consent provisions for consistency of informational requirements and, to the extent applicable, procedural requirements.
The memo also points out that companies should also review their shareholder approval thresholds in order to ensure compliance with state law and the consistency of corresponding proxy disclosures. The NYSE’s recent clarification of how it interprets the “votes cast” on a particular proposal provide yet another reason to take a look at this provision of your bylaws.
This Deloitte report addresses several topics that many businesses will find very relevant in the current environment – the financial reporting implications of inflation, supply chain disruptions and labor shortages. Here’s an excerpt addressing some of the accounting concerns associated with supply chain issues:
For many companies, such disruption is significantly increasing the costs associated with moving goods through the supply chain. If the higher costs are included in inventory, companies should consider whether these costs drive up the cost of the inventory in such a way that adjustments based on the expected net realizable value of the inventory are warranted. This determination is likely to vary by industry and by company given (1) the use of different types of materials, (2) diversity in suppliers, and (3) a company’s ability to transfer cost increases to its customers through higher selling prices.
While the goods are making their way through the disrupted supply chain, companies should consider the point in time at which the buyer actually assumes ownership of the goods to ensure appropriate reporting of raw materials, finished goods, and supplies on their balance sheets. Companies that may have had only immaterial amounts of goods in transit because of historically short transit times may find it necessary to implement more robust accounting processes and internal controls to appropriately capture their inventories (some of which may be physically held by third parties). Likewise, companies should ensure that suitable cutoff procedures result in revenue recognition in the appropriate period.
In addition, companies struggling to obtain certain products that are inputs to finished goods, such as microchips, may consider adjusting their manufacturing processes to use different inputs or manufacture the products differently. Companies should consider whether the need to use alternate raw materials or processes affects the warranties offered and the accounting for those warranties.
Issues like these are worth keeping in mind as companies prepare their financial statements, but their potential implications should also be considered in preparing the MD&A and Risk Factors sections of upcoming SEC filings.
The FBI issued a warning notification earlier this month that cyber-criminals were targeting companies engaged in significant financial transactions. Here’s the summary:
The FBI assesses ransomware actors are very likely using significant financial events, such as mergers and acquisitions, to target and leverage victim companies for ransomware infections. Prior to an attack, ransomware actors research publicly available information, such as a victim’s stock valuation, as well as material nonpublic information. If victims do not pay a ransom quickly, ransomware actors will threaten to disclose this information publicly, causing potential investor backlash.
This Dechert report on the FBI’s action says that companies engaging in IPOs or significant M&A transactions should not postpone security fixes their transactions are completed. Companies with major financial events on the horizon should be be particularly attentive to cybersecurity vulnerabilities, “including monitoring underground forums for stolen credentials.” The report says that the time period following closing of a merger is also perilous, and that cybersecurity processes and procedures should be aligned before the deal closes in order to reduce the risk.
Non-fungible tokens, or NFTs, are the latest craze to sweep the crypto world. This Foley blog provides a legal checklist for parties who may be interested in creating a platform for monetizing artworks or other items through nonfungible tokens. Here’s an excerpt with some of the specific items that entrepreneurs need to keep in mind:
– Formation: You’ll need to form a corporate entity before launching a marketplace. This will offer your business the most substantial liability protection, greater ability and credibility when seeking financing from external sources.
– Conduct Code: Most NFTs, given the predominance of user-generated content and transactions in NFT marketplaces, include an extra layer of legal restrictions in the form of codes of conduct to govern interactions on the platform.
– Smart Contracts: The unique digital creation must be independently identifiable, with ownership transferable within the smart contract. Creators should design-in the economics of trading: How much for a primary sale, how much for secondary sales, royalties, transaction costs and other features of the aftermarket to enable trading, with funds flowing to the appropriate parties by design.
– Platform Terms of Service: NFT marketplaces must have essential documents such as Terms of Service, which govern the relationship between the NFT marketplace operator and customers, and between the buyers and sellers of the NFTs featured on the platform. A well-thought-out terms of service agreement can help protect your organization from various legal issues and generally have provisions limiting the company’s overall liability.
There are lots more where these came from, but I’ve got to admit, I’m still scratching my head about NFTs. After all, what’s the long-term investment value of “ownership” of a piece of digital art that a prankster can grab simply by right clicking?
When last we checked-in on The Wu-Tang Clan, the US Attorney for the EDNY had just announced the sale of the group’s “Once Upon a Time in Shaolin” album to an unidentified buyer. Now, the NYT reports that the details of that transaction have been made public. By now, it won’t come as any surprise for those of you who’ve been following our reporting on The Wu-Tang Clan that there’s a crypto connection:
PleasrDAO, which took possession of the album on Sept. 10 and is keeping it in a “vault” somewhere in New York City, has decided to come forward, to celebrate its trophy and announce its goal to ultimately, somehow, make the album more widely available for fans to hear — if, that is, it can convince RZA, the Wu-Tang’s leader, and his fellow producer Cilvaringz to allow it.
PleasrDAO’s Jamis Johnson described the purchase as appealing to the group’s interest in acquiring signature items of digital culture, as well as to a wider mission that it shares with many cryptocurrency champions: prying artistic creations from an exploitative, antiquated economic system and offering the promise of a fairer one. “This album at its inception was a kind of protest against rent-seeking middlemen, people who are taking a cut away from the artist,” Mr. Johnson said in a video interview from his apartment in Brooklyn. “Crypto very much shares that same ethos.”
Although “Once Upon a Time” predates the recent craze for NFTs — “nonfungible tokens,” or digital items created using blockchain computer code, preventing them from being duplicated and allowing their provenance to be tracked — the group’s goal of recapturing the value of artistic scarcity in the digital age has led it to become seen as a kind of precursor. “The album itself is kind of the O.G. NFT,” said Mr. Johnson, 34, who was proudly sporting a Wu-Tang T-shirt.
For those of you who aren’t Wikipedia userscrypto-savants like me, a DAO is a “decentralized autonomous organization,” which means “an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government. A DAO’s financial transaction record and program rules are maintained on a blockchain.” Yeah, that really didn’t clear things up for me – and neither did a visit to PleasrDAO’s website. But whatever they are, DAOs are definitely tres chic. That’s because the SEC issued a 21(a) report addressing the DAO structure in 2017, & as Dave recently blogged, the agency just brought an enforcement action against another DAO earlier this month.
Anyway, the New York Times says that PleasrDAO wants to release the album in some fashion to the public, but first they’ll need RZA & Cilveringz to sign-off on whatever they’re planning, because they inherited the contractual restrictions imposed on the original buyer, fraudster Martin Shkreli, which prohibit a public release of the album until 2103. Cilveringz is apparently game, but so far there’s no word from RZA, which means that the DAO’s plan to release the O.G. NFT that it acquired from the DOJ may be DOA.
We’re taking a break from blogging for the rest of the week. Happy Thanksgiving!
According to Cornerstone Research’s recent report on SEC enforcement activity, the number of actions against public companies declined during fiscal 2021. That marks the second year in a row that the number enforcement actions targeting public companies declined. Here are some of the highlights:
– The SEC filing 53 enforcement proceedings against public companies or their subsidiaries in fiscal 2021, nine fewer than in fiscal 2020 and the lowest level since fiscal 2014. The number of fiscal 2021 filings was 32% lower than the average over the past five fiscal years.
– Reporting and disclosure violations were the primary allegations in 51% of the cases filed during fiscal 2021. FCPA actions accounted for only 8% of the cases – the lowest level on record.
– The SEC noted cooperation in 58% of public company settlements in 2021, which is consistent with prior year averages. The median monetary settlement was $1 million, significantly below the $4 million median average for fiscal years 2012-2020.
– The number of settlements requiring admissions has declined from five in fiscal 2019 to two in fiscal 2020 and bottomed out at zero in fiscal 2021.
In evaluating the report’s conclusions, it’s worth noting – as the report points out – that a decline in enforcement actions against public companies is consistent with trends seen in prior years when there was a transition in SEC Chairs.
