On Friday, Liz blogged about the SEC’s changes to the definition of a “smaller reporting company” & its adoption of a new requirement for companies to use Inline XBRL in their filings. This Steve Quinlivan blog points out that changes have been made to many of the SEC forms due to this new regime. We’re posting memos about this development in our “Smaller Reporting Companies” Practice Area.
This excerpt from Steve’s blog notes the effect of the new Inline XBRL requirement – and points out that changes to the form may be applicable before compliance with the new requirement becomes mandatory:
The new Inline XBRL rules include conforming amendments to the cover pages for certain periodic reports, including Forms 10-K and 10-Q. The change to the cover pages eliminates reference to compliance with the website posting requirement. While there is a generous phase in period for required use of Inline XBRL, the rules are technically effective 30 days from publication in the Federal Register. Therefore, these changes to the cover page are potentially applicable to second quarter Form 10-Qs for calendar year issuers.
The changes to the “smaller reporting company” definition have resulted in conforming amendments to the cover pages for registration statements (Forms S-1, S-3, S-4, S-8, S-11, Form 10) & periodic reports (Forms 10-K and 10-Q). The change reflects the fact that while the new rules specify a larger threshold for SRC status, the definition of “accelerated filer” remains unchanged. The rules are effective 60 days from publication in the Federal Register.
Forget Fireworks – The Future Belongs to Flame-Throwing Drones!
If I had this awesome device, I’d win the 4th of July pyrotechnics contest in my neighborhood for sure. Enjoy the holiday – and don’t hurt yourself.
Lots of interesting stuff in this Proskauer memo analyzing market practices & trends for US-listed IPOs in 2017. Here are some of the highlights:
– In 2017, the average base deal size was $285 million and the median base deal size was $141 million, compared to $214 million and $116 million in 2016, respectively.
– 70% of EGCs included two rather than three years of audited financial statements (a 32% increase since 2013) and 56% of EGCs included only two years of selected financial statements (a 21% increase since 2013). Only 4% of EGCs included five years of selected financial statements in 2017, compared to 29% in 2013.
– Outside of 2014, IPOs in 2017 had the fastest time from the first confidential submission or filing with the SEC to pricing; the average number of days to pricing was 135 and the median was 103. In 2016, the average time from first submission/filing to pricing was 220 days.
– Since 2014, there has been a 41% decrease in the average number of first-round SEC comments and 37% decrease in the median number of comments.
– Approximately 30% of issuers went public with multiple classes of common stock in 2017 as compared to 18% of issuers in 2016. Almost 68% of these issuers provided for unequal voting rights among classes.
There’s plenty more where that came from – including information on “hot button” comments and data on pre-IPO private placements.
Insider Trading: Another Equifax “Guesser” in the Hot Seat
We previously blogged about the SEC’s filing of insider trading charges against a former Equifax executive who sold the company’s shares based on his correct guess that the company had experienced a massive data breach.
Last week, the SEC filed an insider trading complaint against another former Equifax employee, and this excerpt from the SEC’s press release indicates that the agency’s “insider guessing” theory features prominently in this new proceeding as well:
In a complaint filed in federal court in Atlanta today, the SEC charged that Equifax software engineering manager Sudhakar Reddy Bonthu traded on confidential information he received while creating a website for consumers impacted by a data breach.
According to the complaint, Bonthu was told the work was being done for an unnamed potential client, but based on information he received, he concluded that Equifax itself was the victim of the breach. The SEC alleges that Bonthu violated company policy when he traded on the non-public information by purchasing Equifax put options. Less than a week later, after Equifax publicly announced the data breach and its stock declined nearly 14 percent, Bonthu sold the put options and netted more than $75,000, a return of more than 3,500 percent on his initial investment.
As we noted in a prior blog, the SEC lost a case in 2010 premised on an insider guessing theory, so it will be interesting to see how the theory stands up as these actions move forward.
Our July Eminders is Posted!
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Yesterday, the SEC announced that it adopted amendments to expand the number of “smaller reporting companies” that qualify for scaled disclosure. Here’s the 105-page adopting release – and we’re posting memos in our “Smaller Reporting Companies” Practice Area (also see this blog from Cooley’s Cydney Posner & this blog from Dorsey’s Cam Hoang). These are the key points:
– Companies with a public float of less than $250 million will qualify as SRCs.
– A company with no public float or with a public float of less than $700 million will qualify as a SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year.
– A company that determines that it does not qualify as a SRC under the above thresholds will remain unqualified until it determines that it meets one or more lower qualification thresholds. The subsequent qualification thresholds, set forth in the release, are set at 80% of the initial qualification thresholds.
– Rule 3-05(b)(2)(iv) of Regulation S-X is amended to increase the net revenue threshold in that rule from $50 million to $100 million, so that more companies may be able to omit dated financial statements of acquired businesses.
– The final amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2. As a result, companies with $75 million or more of public float that qualify as SRCs will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.
That last point was emphasized during the SEC’s open meeting (here’s Commissioner Stein’s Statement – and here’s Commissioner Piwowar’s Statement). Corp Fin has begun to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition that, if adopted, would have the effect of reducing the number of companies that qualify as accelerated filers (and are subject to auditor attestation requirements). Some – but not all – believe this would promote capital formation by reducing compliance costs for those companies.
SEC Adopts Inline XBRL
Yesterday, with Commissioner Peirce dissenting, the SEC announced amendments to require the use of Inline XBRL for financial statement information. This means that companies will embed XBRL data directly into Edgar filings instead of posting separate files – and the new data will be readable by both humans & machines. The amendments also eliminate the requirements for companies to post XBRL data on their websites.
There’s no change to the categories of filers or scope of disclosures subject to XBRL requirements. Here’s the 143-page adopting release – also see this Cooley blog.
There’s a phase-in period to comply:
– Large accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2019.
– Accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2020.
– All other filers will be required to comply beginning with fiscal periods ending on or after June 15, 2021.
– Filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.
SEC Proposes Changes to Whistleblower Program
In March, John blogged about the largest whistleblower award to-date – and noted that the SEC has awarded more than $262 million to 53 whistleblowers since the program’s inception in 2012.
Yesterday, the SEC proposed amendments to its whistleblower program. The amendments will allow awards based on deferred prosecution & non-prosecution agreements and clarify the requirements for anti-retaliation protection, among other things. There’s also a controversial proposal to cap award amounts. Here’s the SEC’s announcement & fact sheet. The comment period will remain open for 60 days following publication of the proposing release in the Federal Register.
This review from ISS Analytics shows that there were 127 virtual-only meetings through mid-May, compared to just 99 last year. And for the full year, at least 300 companies are expected to hold some sort of virtual annual meeting (including hybrid) – compared to 236 in 2017 (this doesn’t include companies that webcast meetings on their own). A recent Broadridge summary also notes:
– 10% of virtual meetings were hybrid
– Of the 24 companies that held a hybrid meeting in 2016, 12 of them switched to virtual-only in 2017
– 97% of virtual-only meetings were conducted with live audio, rather than video
– 57% of the companies holding virtual meetings were small-cap, 26% were mid-cap & 17% were large-cap
– 98% of companies allow questions to be submitted online during the live meeting
P&G’s Close Contest: Registered & Plan Shares to Blame for Uncertainty?
Broadridge recently reported this finding from the voting review of Proctor & Gamble’s short-slate proxy contest – where the voting margin ended up being less than 1% of votes cast:
The uncertainty in the validity of the votes occurred entirely within the registered shares and plan shares, while the votes of all of the street name shares were accepted as accurate and not contested.
Proxy Cards & VIFs Will Be More Identical
According to this newsletter, Broadridge is redesigning its “Voting Instruction Form” to make more space for full proxy card language. Here’s an excerpt from the newsletter:
Mr. Norman referred to previous discussions held with the SEC staff on the nature and use of abbreviations when faced with proxy language that is too voluminous to fit within the standard voter instruction form (VIF). He stated that in his recent discussions with the staff, the staff had expressed the view that the VIF should be revised so that it could allow the same language that appears on the proxy card, rendering the need for abbreviations obsolete.
Members of Broadridge management stated in response they were working on a redesign of an expanded VIF designed to permit full use of proxy card language on the VIF. A prototype of the proposed VIF has been drafted and is being submitted for quality assurance testing, with the goal that the new VIF form will be ready for use in September, the beginning of the 2018 fall “mini” proxy season.
Recently, Broc blogged about the SEC allowing anyone to track who reads filings on Edgar. Now we have a different “big data” concern: banks are tracking readership of sell-side research. Here’s an excerpt from this WSJ article:
Banks, under pressure to find new ways to boost revenue in their giant research arms, are collecting loads of data on what their clients are reading and when. Beginning about two years ago, banks started moving from the old system of emailing PDFs to using new websites using HTML5 – a web coding language that allows for more tracking of user activity – for distribution of research notes. With the new technology, they can typically see in real-time exactly what pages are being read, for how long, and by which users.
There’s reason for large investors to feel uneasy about this – and they do:
Some bankers said that hedge funds have asked if they can see a stream of aggregated research data, such as what notes are the most read, or longest read, but also that their banks weren’t selling that information, people familiar with those requests said.
The amped up data-tracking has rankled some customers, who worry that even anonymized readership habits, if shared with other clients, could allow rivals to get ahead of their trades. Capital Group, a Los Angeles firm with about $1.7 trillion in assets under management, has asked banks and other research providers to archive readership data related to the firm and not use it in any way for a period of time, according to people familiar with the discussions.
Are the investors getting that promise in writing? For better or worse, it’s exceedingly common these days for companies to capture & share customer information. I blogged a few months ago on “The Mentor Blog” about how that practice is leading to new liability exposures for officers & directors…
Off-Cycle Engagement: Avoiding Blunders
This Cleary Gottlieb memo gives eight tips on how to handle off-cycle engagement – from shareholders themselves. The intro explains why you should care:
Notwithstanding the chorus of shareholder-engagement advisors & investors singing the praises of holding off-cycle meetings – the truth is that the upside of these meetings is somewhat limited and the downside risks are significant. When pressed, any investor will tell you that if there were an actual proxy contest, even a company with a record of excellent off-cycle engagement is far from immune from a decision by the investor to vote in favor of an activist’s short-slate – and it often happens at the 11th hour of the proxy contest.
More importantly, a poor off-cycle meeting can be more detrimental than no meeting. Indeed, investors report that they regularly leave these meetings with a worse impression of companies. And since many institutional investors will each hold portfolios consisting of hundreds or even thousands of companies, many of them won’t take a meeting each year due to limited bandwidth – which amplifies the adverse consequences of a poor meeting.
Tomorrow’s Webcast: “Proxy Season Post-Mortem – Latest Compensation Disclosures”
Tune in tomorrow for the CompensationStandards.com webcast — “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster, and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
One of the many infuriating airline industry “innovations” over the past several years has been the practice of charging an additional fee for a priority boarding slot. So, I was a little surprised that two prominent law professors recently suggested applying a variation of this priority access model to corporate disclosures:
In our recent article, Making a Market for Corporate Disclosure, we argue that the under-disclosure concern could be addressed in a far broader way by constructing a well-regulated market for tiered access to corporate disclosure. We contemplate a transparent market for early-access rights to corporate information. In this market, firms could sell access to information that they soon would release to the public.
For example, when they have new information that they are willing to share with the public, firms could offer a well-advertised early peek—say, starting at 11:00 a.m.—to anyone willing to pay the market price for it. So long as firms had to make any selectively released disclosure products with material information available to the public by, say, 1:00 p.m., market supply of and demand for those products could generate improved public disclosure. All the while, the current floors of mandatory disclosure need not be changed.
Law professors love ideas like this (anybody up for legalizing insider trading?), but I dunno guys – I’m not sure there’s any aspect of the airline industry that I’d suggest anybody use as a model for anything.
Poll: Paying for Disclosure
Please take a moment to participate in our anonymous poll:
Last week, the WSJ reported that some companies may have found another way to be “creative” when it comes to reporting their results – and it’s attracted interest from SEC Enforcement. Here’s an excerpt:
Enforcement officials at the Securities and Exchange Commission have sent queries to at least 10 companies, asking the firms to provide information about accounting adjustments that could push their reported earnings per share higher, one person familiar with the matter said.
The queries follow the release of an academic paper that found evidence of companies nudging up earnings results. The academic research found the number “4” appeared at an abnormally low rate in the tenths place of companies’ earnings per share. Reporting that figure as “5” or higher allows a firm to round up its earnings per share another cent. For instance, a company with earnings of 55.4 cents a share would round to 55 cents a share, while a company with earnings of 55.5 cents a share would round to 56 cents.
What’s kind of puzzling is how long it’s taken for this alleged practice to draw attention from regulators. Warren Buffett actually raised this issue – and cited the study referenced in the WSJ article – at the 2010 Berkshire-Hathaway annual meeting.
Board Oversight: Updating Caremark for the #MeToo Era?
We’ve previously blogged about the increasing focus on the board’s oversight responsibilities in the area of sexual harassment. This Cleary Gottlieb blog suggests that the principles underlying Delaware’s Caremark doctrine might well provide the basis for an expanded concept of what’s required of corporate boards in the #MeToo era. This excerpt explains:
Chancellor Allen anticipates today’s business challenge for directors by expressly premising his holding on moral considerations: “one wonders on what moral basis might shareholders attack a good faith business decision of a director as ‘unreasonable’ or ‘irrational’” (emphasis added). That is not to say that the Caremark opinion suggests that moral failures should be a basis for director liability.
Rather, the Caremark opinion suggests that the standard for director liability should in some way reflect the moral issues at stake: asking whether there is a moral basis for the courts to hold directors liable for not ferreting out an obscure compliance failure that results in a modest financial penalty is also by implication asking whether there is a moral basis for the courts to not hold directors liable for turning a blind eye to issues of great political, social or cultural consequence.
For those who consider social issues as being beyond the responsibility of corporate boards, the blog cautions that Caremark’s “duty of attention” may provide the moral basis for judging directors based on how they deal with these issues.
Cybersecurity: What to Think About When Buying Cyber Insurance
Earlier this year, we blogged about efforts by some of the nation’s largest companies to get into the cyber insurance game. Now this Wachtell memo has some advice for those on the buy side about what they should consider when shopping for coverage. This excerpt addresses coverage for “preexisting conditions”:
Companies should understand whether a policy will restrict coverage for breaches stemming from conditions existing at the time the policy is purchased. While sometimes explicit, such limitations can also be implicated through the use of a “retroactive date” for the start of coverage. As some cyber events are caused by a latent, sometimes long-existing, vulnerability in a company’s infrastructure, this type of carveout could result in a significant gap in coverage.
Other topics include coverage of third party claims, the need to ensure that policy provisions are consistent with cyber-incident response plans, & coverage for data under the control of third parties.
Yesterday, in Lucia v. SEC, the SCOTUS held that the SEC’s appointment process for its ALJs violated the Appointments Clause of the U.S. Constitution. As this excerpt from the opinion’s syllabus notes, the Court’s decision was based primarily on its earlier decision in Freytag v. Commissioner, 501 U. S. 868 (1991), which held that Tax Court “special trial judges” were “officers of the United States” for purposes of the Appointments Clause:
Freytag’s analysis decides this case. The Commission’s ALJs, like the Tax Court’s STJs, hold a continuing office established by law. SEC ALJs “receive[ ] a career appointment,” to a position created by statute. And they exercise the same “significant discretion” when carrying out the same “important functions” as STJs do. Both sets of officials have all the authority needed to ensure fair and orderly adversarial hearings – indeed, nearly all the tools of federal trial judges.
The Trump Administration’s decision to “switch sides” in this case & support the argument that the SEC’s ALJs were unconstitutionally appointed might suggest that the case was decided along partisan lines. But that’s not what happened. Justice Kagan delivered the Court’s opinion, and the Chief Justice and Justices Thomas, Kennedy, Alito & Gorsuch joined in the opinion. Justice Breyer also concurred – in part – in the Court’s decision. Justices Ginsburg, Sotomayor & Breyer (in part) dissented. We’re posting memos in our “SEC Enforcement” Practice Area.
What About Prior ALJ Decisions?
As we’ve previously blogged, some have suggested that the decision to invalidate the SEC’s appointment process for its ALJs might call into question the validity of prior decisions. The Lucia Supreme Court didn’t speak to that issue directly, but if you’re interested in reading tea leaves, check out this excerpt from Justice Kagan’s opinion:
This Court has held that “one who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case” is entitled to relief. Ryder v. United States, 515 U. S. 177, 182–183 (1995). Lucia made just such a timely challenge: He contested the validity of Judge Elliot’s appointment before the Commission, and continued pressing that claim in the Court of Appeals and this Court.
That emphasis on a “timely challenge” suggests that parties who didn’t make a timely objection to the ALJ’s authority in their particular case may be out of luck if they try to challenge a decision now. Or maybe not – look, I mostly played softball in law school, so don’t expect profound insights on SCOTUS opinions from me.
SEC to Consider Proposed Changes to “Smaller Reporting Company” Definition
According to this “Sunshine Act” notice, the SEC will consider adopting proposed amendments to the definition of the term “smaller reporting company” at an open meeting to be held next Thursday, June 28th. Other items of interest on the agenda include:
– Consideration of a proposed rule amendment that would mandate the use of “Inline XRBL” – which allows filers to embed XRBL data in filings – in operating company financial statement information and mutual fund risk/return summaries.
– Whether to propose amendments to the SEC’s whistleblower rules.
I’m pretty excited that Nina Flax of Mayer Brown is willing to share the following with us (let Nina know what you think of her list of lists!):
At the recent “Women’s 100” in Palo Alto, I decided to share two (overachiever, I know) interesting facts during the intros (where each attendee stands up & provides a “fun fact” about themselves). In addition to the fact that I’ve been to North Korea, I am a perpetual “list maker.” My second fun fact was: the night before the event, I couldn’t fall asleep (common problem for me), so I had been up until 2 am making an excel list of all of the words my son knows. Yes, I am crazy.
But I am also fortunate! Apparently, lists are cool. So Broc & Liz asked me to contribute some lists for this blog. Where to begin? A list of potential lists! So here it goes…
1. Things On My “To Do List” I Never Get To
2. Why I Love LinkedIn
3. Crazy Things I’ve Done For The Job Lately
4. How I Try to Balance Work & Life
5. Things I Miss From Pre-Law Days
6. Things I Still Do Infrequently
7. Some Truly Horrifying Quotes
8. The Hidden Gem Associates
9. Meaningful Law School Characters
10. Things I Feel When Reviewing Agreements
11. Things About My Job That Exhaust Me
12. Ways We Make Our Office Fun
13. My “Personal Grateful” List for Today
14. My “Work Grateful” List for Today
15. Things That Are Always On My Desk
16. How I’ve Mastered Work Travel
17. My Favorite Shows I’ve Binge Watched Lately
18. Questions I Have About The “Other Side”
19. Why I Always Question My Skills
20. Things I Constantly Scope on Amazon
I am sure I will come up with a bunch more – and I am not promising any of the above in any particular order! Stay tuned…
Auditors Being Tipped Off Before Inspections: Will Your Company’s Name Surface?
Yes, your company may be impacted by shenanigans committed by your independent auditor. The intro from this MarketWatch piece by Francine McKenna makes that clear:
Former KPMG executives are on trial for obtaining confidential information about audit inspections. The auditor of some of the world’s largest banks including Citigroup, Credit Suisse and Deutsche Bank was tipped off before a regulator inspected them.
It’s been previously reported that KPMG executives were able to extract from the regulator, the Public Company Accounting Oversight Board, confidential information ahead of inspections, and use that information to correct their work and at least in one instance, withdrawn an opinion. But MarketWatch now has court documents that, for the first time, names the audit clients caught up in the scandal.
The SEC’s Proposed Long-Term Strategic Plan
Every time that the SEC comes out with its strategic plan, I blog about how I dislike five-year horizons for any plan since unforeseen events often change priorities & needs (here’s an example of a past blog). As noted in this Cooley blog, the SEC has come out with a draft of its latest strategic plan. Nothing earth-shattering as it essentially recaps what Chair Clayton has been saying since he took office – here is Chair Clayton’s testimony about the plan…
Recently, I blogged about a study that tracks whether mutual funds & proxy advisors are reading your proxy online. I threw in an aside that “If I was an institutional investor, I would still be asking for paper as that seems like a far easier way to actually read a proxy.” It might be easier to read a proxy if you did a straight read – but the reality is that investors drill down into the areas that they are most interested in.
In other words, investors typically read proxies electronically. They like the ability to word search. They like the ability to quickly move around. In fact, they like it when you provide links in your “executive summary” of the proxy to more detailed discussions. Karla Bos of Aon provides even more wisdom:
1. Another big reason that investors use electronic proxies (aside from sheer volume) – governance teams often cut & paste sections of the proxy into emails or other materials for their portfolio managers & proxy committees
2. Investors want links from the table of contents (no links there often means the rest of the proxy and perhaps the company’s governance are “old school” — first impressions count)
3. When investors analyze your proposals, before going to your proxy, many rely on proxy advisor reports or data feeds (for the facts, not their recommendations), so remember that if investors can’t quickly find what they need, the proxy advisors may not either
4. On word searches – ensuring your investors can quickly find what they want means you have to know them and the terms & content they’re looking for
5. I like how GE uses internal links – and even includes an index of frequently requested information right up front. But proxies don’t have to have all the bells & whistles that GE’s does to make navigation more shareholder friendly.
So there you have it, several more “pro tips” to learn from this blog. And yes, I was wrong. And you were right…
Revenue Recognition: Corp Fin Comments Begin
Just yesterday, I blogged that Corp Fin planned a lighter touch when issuing comments on the new revenue recognition standard – and now Steve Quinlivan has blogged about how the comments have begun rolling in…
Big Four Audit Quality Review Results Decline
As the Big Four appear to continue to push back against the PCAOB regulating them here in the US (the PCAOB’s budget was cut in December & much of the senior staff has been let go since), here is sobering news from the UK’s Financial Reporting Council:
The Big Four audit practices must act swiftly to reverse the decline in this year’s audit inspection results if they are to achieve the targets for audit quality set by the Financial Reporting Council (FRC). Overall results from the most recent inspections of eight firms by the FRC show that in 2017/18 72% of audits required no more than limited improvements compared with 78% in 2016/17. Among FTSE 350 company audits, 73% required no more than limited improvements against 81% in the prior year.
Across the Big 4, the fall in quality is due to a number of factors, including a failure to challenge management and show appropriate scepticism across their audits, poorer results for audits of banks. There has been an unacceptable deterioration in quality at one firm, KPMG. 50% of KPMG’s FTSE 350 audits required more than just limited improvements, compared to 35% in the previous year. As a result, KPMG will be subject to increased scrutiny by the FRC.
Meanwhile, two editorial pieces – this one by the financial editor of the Times and this one by a senior editor at Bloomberg – has suggested that the Big 4 might need to be broken up…
