Yesterday, the SEC Staff issued a statement that reminds companies of their disclosure obligations around the imminent LIBOR transition. This Stinson blog provides a summary:
The publication of the one-week and two-month USD LIBOR maturities and non-USD LIBOR maturities will cease immediately after December 31, 2021, with the remaining USD LIBOR maturities ceasing immediately after June 30, 2023. The statement discusses the generally preferred alternative rate – the Secured Overnight Financing Rate (“SOFR”).
The statement said the SEC staff encourages companies to provide qualitative disclosures and, when material, quantitative disclosures, such as the notional value of contracts referencing LIBOR and extending past December 31, 2021 or June 30, 2023, as applicable, to provide context for the status of the company’s transition efforts and the related risks. For example, companies with material risk related to outstanding debt with inadequate LIBOR fallback provisions should consider disclosing how much debt will be outstanding after the relevant cessation date and the steps the company is taking address the situation, such as renegotiating contracts or refinancing the obligations. To the extent that a company has or is taking steps to identify and assess LIBOR exposure and mitigate material risks or potential impacts of the transition, the company should consider providing investors insight into what the company has done, what steps remain, and the timeline for further efforts.
According to the SEC, companies generally include disclosures about the LIBOR transition as part of risk factors, recent developments, MD&A and/or quantitative and qualitative disclosures about market risk. To the extent a company provides this disclosure in response to more than one disclosure requirement within a filing, the SEC encourages companies to consider providing a cross-reference or otherwise summarizing or tying the information together so an investor has a complete and clear view of the company’s plan for the discontinuation of LIBOR, the status of the company’s efforts, and the related risks and impacts. The SEC staff expects disclosures to evolve over time as companies provide updates to reflect transition efforts and the broader market and regulatory landscape.
A little over a year ago, the US Supreme Court reaffirmed the SEC’s authority to seek disgorgement as a remedy in enforcement actions, in Liu v. SEC. However, the Court set some parameters on that authority: the disgorgement award can’t exceed the wrongdoer’s net profits and that the money must be returned to the victims. Now, the SEC appears to have established a way to comply with these parameters. This Troutman Pepper memo summarizes a recent holding from the 5th Circuit, which is the first federal appellate court to evaluate a disgorgement remedy post-Liu. Here’s an excerpt:
The order did not impose joint-and-several liability, but instead assessed each defendant’s gain and disgorgement amount. The SEC also identified victims and created a process to return disgorged funds to them. Under the district court’s supervision, any funds recovered will go to the SEC, acting as a de facto trustee. The SEC will disburse those funds to victims, but only after district court approval. The Fifth Circuit found that the process outlined by the SEC satisfied the standards articulated in Liu.
The Blackburn decision provides a roadmap for how the SEC may pursue disgorgement and comply with the new limitations. When the SEC seeks disgorgement in future matters, it will likely abide by a similar process and identify specific victims to whom disgorgement funds will be disbursed.
Yesterday, the SEC’s Acting Chief Accountant, Paul Munter, issued this statement to recap the 2021 activities of the Office of the Chief Accountant – and preview what could be coming. It’s not unusual for the head of the OCA to make a statement like this near year-end (here’s last year’s). This year’s version caught my eye because it’s a reminder of the many complexities that have cropped up during 2021 – like a BuzzFeed “Best of ’21” list, but for accounting. For example:
1.SPAC accounting – speaking of BuzzFeed and de-SPACs…the OCA has received a large number of consultations on accounting issues for IPO companies this year, including those going public via a SPAC. The statement reiterates the importance of ensuring that appropriate personnel and processes are in place to produce financial statements in accordance with U.S. GAAP applicable to public business entities, which would include the reversal of any previously-elected Private Company Council accounting alternatives available to private companies and, depending on the issuer’s status, earlier effective dates for most standards.
2.Revenue Recognition – Similar to observations the OCA has shared in the past, revenue consultations are numerous and often relate to the identification of the company’s performance obligations, including the principal versus agent analysis, identification of the company’s customer(s), and accounting for consideration payable to a customer.
3.Crypto – While the OCA welcomes constructive dialogue on whether accounting standards could be revised to better reflect the underlying economics of digital asset transactions or business models, this statement reminds stakeholders that there is an existing accounting framework that is robust and provides a basis to account for and report these assets and related transactions. Application of the existing accounting guidance often requires judgment and depends on the issuer’s specific facts and circumstances. The statement also emphasizes the FASB’s and IASB’s work to consider feedback from their respective agenda consultation processes will be important in this area.
4.Auditor Independence – This statement reiterates Munter’s October comments about the importance of auditor independence. It notes that the number of auditor independence consultations has increased. In applying the principles-based standard of Rule 2-01 of Regulation S-X, OCA staff has consistently provided the view that it would be a high hurdle to reach a conclusion that the accountant could be viewed as objective and impartial under the general standard when an auditor has provided services in any of the periods included in the filing that are contrary to one of the Rule’s four guiding principles.
5.PCAOB Oversight – The statement touches on the Commission’s authority to oversee the PCAOB, including by appointing board members, and notes that the OCA advises the Commission on its responsibilities. Last month, the SEC announced appointments of new PCAOB members (some Republican members of the House Financial Services Committee and the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets recently requested an inquiry into the removal of Bill Duhnke earlier this year, but the statement doesn’t dive into that drama).
6.OCA Role in Rulemaking – The OCA has been involved with the SEC’s rulemaking effort on climate risk disclosure. That includes involvement with international financial reporting standards, which have been a big topic of discussion when it comes to standardization of ESG disclosures. OCA has also been involved with rulemaking about risks of investments in companies with China-based operations, and the impact of different types of restatements on executive compensation clawbacks.
Paul Munter’s statement is also worth checking out because it gives tips for accounting standard setters, companies, auditors and audit committees. These are areas that the Office of the Chief Accountant (and the Commission) are focused on, so you should be too. Here are a few nuggets:
1.Estimates & Assumptions – Munter says that he cannot overstate the importance of preparers making well-reasoned and supported judgments that are grounded in their particular facts, relevant rules, and accounting principles and that consider the usefulness and transparency of the resulting information provided to investors. Companies should also ensure that significant judgments and estimates are disclosed in the financial statements in a clear and transparent manner that is understandable and useful to investors.
2.Internal Controls – Companies must continually assess and evaluate whether their ICFR environment is effective. In light of significant changes to many companies’ operations, for example, changes to their financial reporting processes in a remote work environment, the OCA reminds preparers that if any change materially affects, or is reasonably likely to materially affect, an entity’s ICFR, such change must be disclosed in quarterly filings in the fiscal quarter in which it occurred (or fiscal year in the case of a foreign private issuer).
3.Audit Committee Responsibilities – Audit committees are getting more involved with ESG, cybersecurity, tax risks, and more. It is important that audit committees assess whether the scope of their responsibilities is appropriate, achievable, and aligned with the experience of its members, and importantly, not lose sight of their core responsibility — oversight of financial reporting, including ICFR, engagement of the independent auditor, and oversight of the external audit process. Munter says that he cannot overstate the importance of independent and diverse thinking brought by independent directors in fulfilling this responsibility.
4.Audit Quality – Audit committees must consider the sufficiency of the auditor’s and the issuer’s monitoring processes, including those that address corporate changes or other events that could affect auditor independence. In addition to evaluating independence of the auditor, it is foundational to high quality audits that audit committees give careful consideration to audit quality, and not merely focus on price, when appointing and retaining auditors.
The WSJ recently reported that for the third year in a row, more money has been raised through IPOs on Nasdaq than on the NYSE – in part because of SPACs, but also partly because of a perception that Nasdaq is more focused on ESG criteria. According to the article, companies that emphasize ESG in their prospectus seem more inclined to want to reflect that in their exchange choice as well.
That focus on ESG is also one of the reasons that dual listings on the Long-Term Stock Exchange could become attractive – particularly now that a couple of issuers have blazed the trail for listings. Join us tomorrow for the webcast – “Understanding LTSE Listings” – when LTSE Services’ Martin Alvarez and Jane Storero, Asana’s Katie Colendich and Eleanor Lacey, and Twilio’s Mariam Sattar share practical tips about the listing process and what it means to be traded on the LTSE.
If you attend the live version of this 60-minute program, CLE credit will be available! You just need to submit your state and license number and complete the prompts during the program.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, subscribe now! The webcast cost for non-members is $595. You can renew or sign up by emailing sales@ccrcorp.com – or call us at 800.737.1271.
Investors representing over $2 trillion in assets under management are urging ISS to take a stricter stance on climate progress in its upcoming policy updates, according to this LinkedIn write-up from Majority Action’s co-founder. Zevin Asset Management, Boston Common Asset Management, ICCR and the Nathan Cummings Foundation were among the signatories.
As Dave blogged last month, ISS has proposed policy updates that would recommend against the re-election of directors that aren’t meeting expectations around climate-related disclosures or that haven’t set quantitative GHG reduction targets. The investors are saying that those policy guidelines – if adopted – would give too much leeway for under-performance and that they are more focused on the quality of disclosure than on assessing decarbonization activities. Here are the changes that the investors want ISS to incorporate into its benchmark voting guidelines for the 2022 proxy season:
1. Expand and disclose the analysis on company climate performance to assess whether a company’s current and future business plans, capital allocation, and political activity are aligned with a 1.5°C scenario and/or science-based sectoral decarbonization plans (e.g., IEA Net-Zero Roadmaps, Science-Based Targets Initiative).
2. Incorporate company climate performance into vote recommendations, including:
– Recommend votes against directors for failure to adequately manage or mitigate ESG risks, including failure to align business plans, capital allocation, and policy influence (political spending and direct/indirect lobbying activities) with a 1.5°C scenario. Clarify that when information is unavailable to make that determination, ISS will recommend votes against directors.
– Recommend votes in favor of shareholder proposals that call for the reduction of greenhouse gas emissions, disclosure of lobbying and political activity, and/or reports on greenhouse gas emissions, instead of taking a case-by-case approach to proposals, unless the company has demonstrated meaningful alignment of its business activities with a 1.5°C scenario.
3. When recommending votes be cast against management’s recommendations for climate-related reasons, incorporate into the rationales for climate-related votes whether the company’s business strategy and operations align with a 1.5°C scenario.
Last year, ISS published its updated proxy voting guidelines in mid-November, so it’s likely that the 2022 updates will be coming soon. Mark your calendars now for our January 13th webcast with Marc Goldstein, Head of US Research at ISS, along with Davis Polk’s Ning Chiu and Gunster’s Bob Lamm. We’ll be discussing the 2022 policy updates – as well as what to prepare for when it comes for director elections, shareholder proposals, say-on-pay and sleeper issues. CLE credit is also available!
Last week, the SEC posted notice & immediate effectiveness of a Nasdaq proposal to increase annual listing fees. The new fee schedule takes effect January 1st.
For the Nasdaq Global Select & Global Markets, the all-inclusive annual fee for most equity securities will increase by $1-4k/year. For the Nasdaq Capital Market, the increase ranges from $1.5-4k/year. While the increases are modest, every dollar counts for budgeting!
Last week, an industry working group of 800+ brokerage firms, custodians, and clearinghouses released this 43-page report to recommend a transition to a “T+1” settlement cycle for market transactions. The Securities Industry & Financial Markets Association, working with the Investment Company Institute, The Depository Trusty & Clearing Corporation and Deloitte, led the working group.
Although the SEC’s Investor Advisory Committee had recommended a one business day settlement cycle way back in 2015, when the SEC adopted 2017 rules on the topic, it just moved incrementally from a T+3 requirement to T+2. But earlier this year, investors, SEC Chair Gary Gensler and DTCC blamed slow settlement times as one factor in the meme stock frenzy. The push for a shorter cycle now seems to be gaining more momentum. Here are a few of the new report’s recommendations and conclusions:
Corporate Actions:
• Coordinate with regulators and exchanges to align the ex-date with the record date for regular-way corporate actions
• Adopt SWIFT messaging, or other automated means, across the corporate actions lifecycle to increase efficient communication by industry participants related to corporate action events
• Industry to evaluate whether the cover/protect period should be eliminated
Equity & Debt Offerings
• Retain the exception in Rule 15c6-1(c) but shorten the applicable period to T+2
• Retain the exception in Rule 15c6-1(d) to allow debt and other offerings to have the ability to opt for extended settlement
Regulatory Impacts
• Continue to engage the regulatory community to ensure that rules and regulations that identify regular way settlement as greater than T+1 be changed, including the SEC’s capstone rule 15c6-1(a) of the Securities Exchange Act of 1934 and the associated rules derived from it, to create regulator certainty for market participants
Same-Day Settlement
• As the industry analyzed the migration to T+1 settlement, the IWG also considered the impacts and benefits of moving to T+0 settlement. The ISC and IWG concluded, by consensus, that T+0 is not achievable in the short term given the current state of the settlement ecosystem.
I blogged back in May that if T+1 is adopted, it would have the most impact on broker-dealer obligations. Particularly in debt transactions, issuers sometimes prefer longer settlement periods so that interest doesn’t start accruing. These recommendations suggest that the exception for extended settlement would continue to exist. The report walks through detailed considerations for how a shorter settlement cycle could affect equity and debt offerings, beginning on page 31.
Yesterday, the SEC adopted amendments to finalize rules implementing the submission and disclosure requirements in the Holding Foreign Companies Accountable Act. These rules apply to issuers that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable to inspect or investigate (referred to as “Commission-Identified Issuers”).
Consistent with the Holding Foreign Companies Accountable Act, the amendments require Commission-Identified Issuers to submit documentation to the SEC through the EDGAR system on or before its annual report due date that establishes that it is not owned or controlled by a governmental entity in its public accounting firm’s foreign jurisdiction. The amendments also require an Commission-Identified Issuer that is also a “foreign issuer,” as defined in Exchange Act Rule 3b-4, to provide certain additional specified disclosures in their annual report for itself and its consolidated foreign operating entity or entities, including any variable-interest entity or similar structure that results in additional foreign entities being consolidated in the registrant’s financial statements. The required disclosures include:
During the period covered by the form, the registered public accounting firm has prepared an audit report for the issuer;
The percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which the issuer is incorporated or otherwise organized;
Whether governmental entities in the applicable foreign jurisdiction with respect to that registered public accounting firm have a controlling financial interest with respect to the issuer;
The name of each official of the Chinese Communist Party who is a member of the board of directors of the issuer or the operating entity with respect to the issuer; and
Whether the articles of incorporation of the issuer (or equivalent organizing document) contains any charter of the Chinese Communist Party, including the text of any such charter.
The SEC will identify an issuer as a Commission-Identified Issuer as early as possible after the issuer files its annual report and on a rolling basis. The SEC will “provisionally identify” an issuer as a Commission-Identified Issuer on the SEC’s website at www.sec.gov/HFCAA. For 15 business days after this provisional identification, an issuer may email the SEC if it believes it has been incorrectly identified, providing evidence supporting its claim. After reviewing the information, the issuer will be notified whether the SEC will “conclusively identify” the registrant as a Commission-Identified Issuer. If the issuer does not contact the SEC to dispute the provisional identification within 15 business days, the SEC will conclusively identify the issuer as a Commission-Identified Issuer. The SEC will publish a list on its website identifying Commission-Identified Issuers, indicating the number of years a Commission-Identified Issuer has been published on the list, and noting whether the Commission-Identified Issuer has been subject to any prior trading prohibitions.
The SEC will impose an initial trading prohibition on an issuer as soon as practicable after it is conclusively identified as a Commission-Identified Issuer for three consecutive years. If the SEC ends the initial trading prohibition and, thereafter, the issuer is again determined to be a Commission-Identified Issuer, the SEC will impose a subsequent trading prohibition on the issuer for a minimum of five years. To end an initial or subsequent trading prohibition, a Commission-Identified Issuer must certify that it has retained or will retain a registered public accounting firm that the PCAOB has determined it is able to inspect or investigate. To make that certification, the Commission-Identified Issuer must file financial statements that include an audit report signed by such a registered public accounting firm.
Believe it or not, disclosure committee practices are always a hot topic. Clients often ask what other companies are doing in their disclosure committees, and it is often hard to benchmark disclosure committee practices because companies are not required to disclose those practices or post their disclosure committee charter. That is why I was pleased to see the recent report, Disclosure committee report: practices and trends, which was released last month and completed jointly by EY, the Society for Corporate Governance, and the Financial Education & Research Foundation, which is the independent nonprofit research affiliate of Financial Executives International. This report is an update to a previous report from 2014, Unlocking the potential of disclosure committees: leading practices and trends.
Key findings from the report include:
Formal disclosure committees are a corporate norm, with nearly all respondents indicating they have one in place.
Staffing of committees is fairly consistent, with members generally being appointed by senior executives.
Written disclosure committee protocols, such as charters, reporting and minutes, have become more prevalent.
Member roles are diverse, spanning, on average, more than 10 different job functions.
Most disclosure committees meet at least quarterly and approximately 60% maintain formal minutes.
Approximately one-third of disclosure committee representatives regularly report to audit committees.
Disclosure committees may have subcommittees and multilayered structures.
While disclosure committees’ focus continues to be primarily on SEC financial reporting and related disclosures, many also review other types of documents, such as proxy statements, sustainability reports and website content.
Overall, the findings in the report highlight common and trending practices regarding disclosure committees’ structure, composition and activities, and the report offers further insight into how companies have been using their disclosure committees to address disclosure requirements and facilitate more effective disclosures.
