Congrats to SEC Chief Accountant Paul Munter, who is retiring from federal service effective January 24th, according to a Commission press release published yesterday. We covered many of Paul’s 22 statements and speeches on this blog. We wish him the best!
“Don’t cross the boss” can be decent advice, depending on the type of boss you have. At the SEC, though, who is the boss right now?
On one hand, Gary Gensler is still in charge for one more week – and he had a certain view on the SEC’s priorities and how to accomplish them. On the other hand, while it’s too early to make solid predictions, Paul Atkins has been tapped to lead the Commission and has made a lot of public comments about easing companies’ regulatory burdens, and he could also transform the enforcement environment. At least one former SEC official thinks things could get a little less treacherous for companies, and that he’ll encourage the Enforcement Division to focus more on individual wrongdoers.
The anticipated shift probably adds a wrinkle to in-process enforcement actions. The SEC’s newsroom has announced a number of settlements over the past few weeks, but of course the one the SEC announced last week with Vince McMahon – former WWE CEO and Linda McMahon’s legal spouse – caught my eye. Yes, celebrity gossip is what drew me in, but the nerdy securities law issues are what kept me reading till the very end.
The gist of the SEC’s findings, which Vinny Mac neither admits nor denies, is that he entered into two hush money agreements under which he, individually, paid a total of $10.5 million. However, the Mac Attack also signed the agreements on behalf of the company, which also benefitted from releases of claims. He didn’t inform WWE’s board, legal department, accountants, financial reporting personnel, or auditor, about the agreements. So, nobody considered whether those transactions needed to be accounted for or disclosed by the company. According to the SEC’s order, that was a problem:
McMahon’s failure to disclose the Agreements caused material misstatements in WWE’s 2018 and 2021 annual reports and certain quarterly reports. Because the payments required by the 2019 agreement were not recorded, even though the amounts were paid or to be paid by McMahon, WWE overstated its 2018 net income by approximately 8% for the year and approximately 22% for the fourth quarter of 2018. Similarly, because the payments required by the 2022 agreement were not recorded, WWE overstated its 2021 net income and the net income for the fourth quarter of 2021 by approximately 1.7% and 4.9%, respectively. In addition, these Agreements should have been disclosed as related party transactions. The subsequent payments were also not reflected in the books and records of the Company.
Quoting again from the order, here’s why this caused a restatement:
Although McMahon was obligated to pay all amounts owed, the payments under the Settlement Agreements should have been recognized as expenses by the Company as of December 31, 2018 and as of December 31, 2021. WWE was a party to the Agreements, as evidenced by McMahon signing on behalf of the Company. In addition, WWE benefitted from the Settlement Agreements, receiving releases and avoiding reputational harm caused by allegations of misconduct by its CEO being made public.
As noted above, not only was there a restatement issue, but because the CEO, Chairman and principal stockholder agreed to make the payments on behalf of the Company, the SEC said that in addition to recording the expense, WWE was also required to disclose the transactions and the subsequent payments when made as related party transactions under GAAP.
But wait, there’s more! After the agreements came to light and the board investigated and identified the restatement triggers, it clawed back incentive compensation payments that McMahon received during the 12-month periods following filings containing the financial statement periods that the company was required to restate. That takes care of one aspect of the required Sarbanes-Oxley clawback (in this case, the smaller part dollar-wise). What the company did not do was claw back profits received from stock sales during the applicable period. The SEC is not one to let any prong of a SOX 304 clawback slip by, so it brought a claim for that too.
Like I said, this order has something for everyone. The SEC brought claims under various provisions. The press release summarizes:
McMahon consented to the entry of the SEC’s order finding that he violated the Securities Exchange Act by knowingly circumventing WWE’s internal accounting controls and that he directly or indirectly made or caused to be made false or misleading statements to WWE’s auditor. The order also finds that McMahon caused WWE’s violations of the reporting and books and records provisions of the Exchange Act. Without admitting or denying the SEC’s findings, McMahon agreed to cease-and-desist from violating those provisions, pay a $400,000 civil penalty, and reimburse WWE $1,330,915.90 pursuant to Section 304(a) of the Sarbanes-Oxley Act.
That penalty seemed relatively light to me, but maybe it’s reasonable under the circumstances. Not only are enforcement priorities an open question, but I can certainly see how a person who’s not well-versed in accounting literature would assume that payments they made individually wouldn’t affect the company’s financials or disclosures. Actually, though, a similar scenario is described right in a Staff Accounting Q&A. I guess that’s why you’d want to run your agreements by the accountants and lawyers.
As reported by Reuters, a committee in Arizona today is considering an application that could have big ramifications for lawyers. From Bloomberg:
Big Four accounting firms have intermittently been seen as a potential threat to Big Law firms, even though they’ve never competed for complex legal work in the US. Many industry observers have said that could possibly change if the Big Four were able to overcome the barrier to practicing law in the US, the world’s largest and most important legal market.
A committee that makes recommendations to Arizona’s top court is slated on Jan. 14 to review an ABS application filed by KPMG Law US. Arizona, unlike most other states, allows approved entities to provide legal services even if some of their owners are not lawyers.
KPMG and other accounting firms have provided legal-adjacent services to companies in the US, but have been restricted from practicing law or providing legal advice. Most US states’ professional ethics rules limit the practice of law, which has a broad definition, and law firm ownership, to licensed lawyers.
KPMG says that if approved, its work would “complement” the services of traditional law firms. Its focus would be on large-scale, process-driven work, such as volume contracting, remediation exercises, M&A-driven harmonization of contracts, and other legal managed services. Stay tuned!
Big 4 firms have been making a play for legal services for more than two decades. This Artificial Lawyer blog says that in countries where they’ve entered the market, they haven’t “rocked the world.” Richard predicts we’d likely see the same (minimal) impact here.
What do you think? Please participate in our anonymous poll to share your view on what would happen if KPMG gets the license it’s seeking:
It’s been gut-wrenching to watch the wildfire destruction that has occurred in California over the past several days. Our hearts go out to the nearly 8 million residents of L.A. and Ventura Counties who are facing dangerous conditions, and everyone else affected by the disaster. I think that even if they haven’t lived in California, many people across the country have some connection to the Los Angeles region. We have all been watching with sadness – as well as hope that people will come together to rebuild.
As of this morning, the SEC has not made a broadly applicable announcement about filing relief, but I expect they would encourage companies and other regulated entities to contact the Staff with questions and concerns and tell investors to watch out for scams, similar to their response to Hurricane Helene. We will continue to monitor developments.
John drew the short draw of blogging over the holidays, and the CTA drama gave him a few things to write about. The saga isn’t over, but we now have more clarity. Here’s an update, courtesy of this McGuireWoods blog:
You may recall that on December 26, 2024, the Fifth Circuit vacated the “part of the motions-panel order granting the Government’s motion to stay the district court’s preliminary injunction enjoining enforcement of the CTA,” as well as the Reporting Rule. In other words, FinCEN cannot enforce the CTA and there is no reporting obligation until this gets resolved.
The Fifth Circuit has issued an expedited briefing. Briefing will occur in February, and the court has scheduled oral argument on March 25, 2025, after which it will need time to issue an opinion. As with the temporary lifting of the injunction precluding enforcement, FinCEN would likely provide additional time to file should the law go back into effect. In light of this schedule, Reporting Companies now have some clarity on the time – likely Q2 2025 – they have to analyze their compliance obligations.
In this 27-minute episode of the “Women Governance Trailblazers” podcast, Courtney Kamlet and I interviewed Karla Munden, who is SVP and Chief Audit Executive with Lincoln Financial Group, and an Independent Director at American Express National Bank. Karla also recently spent time in South Africa as part of the immersive B-Direct program, where she learned how to adapt her U.S.-based corporate governance skills to a different culture. We discussed:
1. Karla’s leadership experiences and learnings over the years.
2. U.S. versus South African approaches to corporate governance and stakeholder priorities, and the importance of cultural dexterity.
3. Leadership lessons from Karla’s Navy service that have translated into her corporate roles.
4. Karla’s experiences on the boards of American Express National Bank and the William and Mary Foundation, including similarities in not-for-profit and for-profit boards, and the top qualities of effective board members.
5. Karla’s role as a minority owner of the Caroline Cobras, a football team in the National Arena League.
6. What Karla thinks women in the corporate governance field can add to the current conversation on the societal role of companies.
To listen to any of our prior episodes of Women Governance Trailblazers, visit the podcast page on TheCorporateCounsel.net or use your favorite podcast app. If there are “women governance trailblazers” whose career paths and perspectives you’d like to hear more about, Courtney and I always appreciate recommendations! Shoot me an email at liz@thecorporatecounsel.net.
I must admit that sometimes I feel like the SEC is really trying to make it hard on us all from a technology perspective. In an ever-expanding effort to satisfy some perceived demands for data from SEC filings, we have endured several decades of complicating what otherwise should be the simple process of submitting an electronic filing that reports the information that the SEC requires to be provided to investors. My latest gripe is with the recently implemented requirement that beneficial ownership reports be submitted in a machine-readable format, rather than as an HTML or ASCII document.
Beginning on December 18, 2024, beneficial ownership reports on Schedule 13D and Schedule 13G were required to be filed with the SEC using a structured, machine-readable XML-based language. This change was adopted as part of the SEC’s Modernization of Beneficial Ownership Reporting rule amendments back in October 2023. In the adopting release, the SEC noted “[t]his requirement is intended to make it easier for investors and other market participants to access, compile, and analyze information that is disclosed on Schedules 13D and 13G.” The XML-based interface is similar to what has been implemented for Form 13F, Form D and Section 16 reports.
The key takeaway here when filing a Schedule 13D or 13G is that you can no longer just send a Word document to the filing service and have them submit the filing on EDGAR soon thereafter. Instead, you will need to complete a worksheet that the filing service provides, which can take more time and effort to complete, particularly when you have a complicated beneficial ownership report. It is best to build in some extra time for this process as everyone gets used to the new interface.
The SEC has announced that it will host the 44th Annual Small Business Forum on April 10, 2025 in-person at SEC Headquarters in Washington D.C., with the option of virtual participation. The announcements notes:
Organized by the Office of the Advocate for Small Business Capital Formation, the Forum brings together members of the public and private sectors—including entrepreneurs, small business leaders, investors, and those that support them across the small business ecosystem—to discuss and provide suggestions to improve securities policy affecting how companies raise capital from investors.
This event is planned for 1:00 pm – 4:30 pm Eastern, with an optional networking reception to follow. A full agenda will be provided as the date draws closer.
As John noted in the blog back in November, all signs point toward the SEC being more interested in promoting small business capital formation. For example, in the area of capital formation, the agenda published by Project 2025 calls for the SEC to take, among others, the following actions:
– Simplify and streamline Regulation A (the small issues exemption) and Regulation CF (crowdfunding) and preempt blue sky registration and qualification requirements for all primary and secondary Regulation A offerings.
– Either democratize access to private offerings by broadening the definition of accredited investor for purposes of Regulation D or eliminate the accredited investor restriction altogether.
– Allow traditional self-certification of accredited investor status for all Regulation D Rule 506 offerings.
– Exempt small micro-offerings from registration requirements.
– Exempt small and intermittent finders from broker–dealer registration requirements and provide a simplified registration process for private placement brokers.
It remains to be seen what regulatory efforts will ultimately be pursued, but it is encouraging that during the first Trump Administration we saw the SEC adopt the comprehensive exempt offering harmonization rule changes, which have proven to be beneficial for small business capital formation (including my favorite part, the adoption of Marty Dunn’s integration manifesto in Rule 152).
‘Tis the season for an avalanche of annual reporting and proxy season reminders as we ramp up our 2025 efforts.
First and foremost, I commend to you our “Annual Season Items” article in the November-December 2024 issue of The Corporate Counsel, which covers a wide range of topics that will be of interest when preparing your annual report and proxy statement. But if you are looking for a more condensed version, check out Weil’s “Top 10 Tips for the Form 10-K,” which does a great job of highlighting the latest top trends and considerations for companies preparing to file their Form 10-K for the fiscal year ending in December 2024, including: lessons learned from recent SEC comment letters, guidance, enforcement proceedings and litigation; new SEC rules and applicable NYSE/Nasdaq corporate governance listing standards; and developments companies face stemming from regulatory, geopolitical and other events, including considerations relating to the new administration.
