At the risk of facing derision from my colleagues here on the blog who hail from much snowier parts of the country, I must say that I have always loved a good snow day. Living in the Baltimore area all of my life, I have never known the workings of the much heartier parts of the country, where snowfall is measured in feet rather than inches and you do not see the ground from November to April. We in the mid-Atlantic are a much more fragile people, and a few inches of snow can wreak havoc on the roadways and cause regional shutdowns of schools, businesses and governments without a second thought. And not to engage in any sort of regional squabbling (although I will anyway), there is a marked difference between how snowfall is dealt with in the Baltimore area as compared to DC. Less than an inch of snow falling in DC is often deemed to be “Snowmageddon,” turning roadways into a Mad Max-style free-for-all and making life miserable for commuters like me. Thankfully, there is now the option of just staying home.
Which brings me to today, where the region is experiencing anywhere from four to ten inches of snow, with more falling in the DC area than near my home. Given the impact of the storm on DC, the U.S. Office of Personnel Management has announced an “Office Closure” in Washington, DC. The notice states:
Federal Offices in the Washington, DC area are Closed. Maximum Telework is in effect.
Telework Employees are expected to work. Generally, telework employees may not receive weather and safety leave.
Remote Workers are expected to work. Generally, remote workers may not receive weather and safety leave.
Non-Telework Employees generally will be granted weather and safety leave for the number of hours they were scheduled to work. However, weather and safety leave will not be granted to employees who are on official travel outside of the duty station or on an Alternative Work Schedule (AWS) day off or other non-workday.
Emergency Employeesare expected to report to their worksite unless otherwise directed by their agencies.
Employees on Preapproved Leave (paid or unpaid) or other paid time off generally should continue to be charged leave or other paid time off and should not receive weather and safety leave.
Back in my days at the SEC, a notice like this would have meant a full fledged “snow day” for government workers, just like when we were kids in school. In retrospect, I loved snow days as both an adult and a child, because it gave us some time to enjoy the magic of the snow and get an unexpected break from school or work. But alas, as with so many things, technology has robbed us of this simple pleasure, because the reality is that the vast majority of folks in the SEC’s Division of Corporation of Finance are telework employees or remote workers, so they must continue to work today, notwithstanding the white stuff outside. This also means that today is still a “business day” for filing purposes and, as far as we know, EDGAR will remain up and running despite the precipitation.
We have posted the transcript for our webcast “Capital Markets: The Latest Developments.” Maia Gez from White & Case, Anna Pinedo from Mayer Brown, Richard Segal from Cooley and Andy Thorpe from Gunderson discussed the current state of the capital markets, explored financing alternatives and discussed IPO readiness and recent developments impacting public offerings.
On the topic of SEC comment letter trends, Andy Thorpe noted:
The top 3 areas of SEC comments were financial statement-related or financial metrics-related. The top area was non-GAAP financial measures, then MD&A, and finally, segment reporting. For non-GAAP measures, the SEC, in December of 2022, issued new C&DIs related to non-GAAP financial measures. Ever since then, there’s been a real focus and scrutiny on companies’ non-GAAP measures.
They look at whether you presented the GAAP measure with equal or greater prominence as the non-GAAP measure and appropriately reconcile to the most comparable GAAP financial measure. They also look at whether you eliminated cash-settled items on the basis that they aren’t part of core operations. The Staff may object to eliminating recurring items. When you have litigation expenses year in year out and you say, “Yes, but this isn’t part of our core operations,” that’s an area where they’re going to object if you remove those types of cash expenses.
Then another big one is the use of individually tailored accounting principles. This is basically saying, “Under GAAP revenue recognition, this is how we have to present revenue, but if we recognize all the revenue upfront, here is what the number would look like.” The Staff objects to that.
Finally, they want improved disclosure of why management believes the non-GAAP measure provides useful information to investors. Not just how management uses it, but why it is useful to investors.
Moving on to MD&A, the Staff goes back to the 2003 interpretive release. I can’t believe it’s been over 20 years since that release came out, but one of the things in that release and one of the typical areas of comment is to provide more description and quantification of each material factor that impacts a specific change in one of the line items in the financial statements. They don’t want you to say, “Revenue or this expense increased by X because of Y.” They want the intricate intermediate factors.
They want to improve disclosure around known trends or uncertainties. In particular, they were looking at supply chain disruptions, the effects of inflation, and increases in interest rates as well. They’re looking to improve disclosures around liquidity and capital resources.
Now, I will move on to segment disclosures. Basically, the SEC will look at your outside reports, outside press releases, and determine, “Okay, wait. You guys are talking about your business in one certain way, but then you’re presenting one reportable segment.”
They will kick the tires around whether you should break out your operations into multiple segments, and often they’re going to ask for the reporting package that’s delivered to the chief operating and decision maker. If that is basically reflective of segments, they’re going to push towards requiring additional segment disclosures. Then one of the other interesting factors on segments is the use of non-GAAP financial measures. When you’re reporting segments, of course you have to remove certain expenses related to overhead that are not applicable to that one segment.
Just in GAAP, in your financial statements as you report segments, you are using a non-GAAP measure, which of course is now sanctioned by GAAP. If the SEC is saying, “Okay, if you use that or a different measure outside of the financial statements, then that’s non-GAAP and you have to comply with Regulation G.” It’s very complicated, but it’s just something to look out for. It’s definitely a pitfall.
Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.
Yesterday’s WSJ featured an editorial with a suggestion for Elon Musk to consider as part of DOGE’s hunt for federal agencies to “wish into the cornfield”. Interestingly, it’s an idea with a bipartisan history and one that just might resonate with incoming SEC Chair designee Paul Atkins – but also one that the crypto industry might not be as enthused about. Here’s an excerpt from the opinion piece by Duke University’s Lee Reiners:
If DOGE is to avoid the fate of prior blue-ribbon commissions and panels with a similar goal, it should begin with the low-hanging fruit and encourage Congress to merge the SEC and CFTC before taking up a crypto market structure bill.
DOGE would have an ally in this effort in Paul Atkins, Mr. Trump’s nominee to lead the SEC. Testifying in 2015 on the effect of Dodd-Frank, Mr. Atkins told the House Financial Services Committee that the legislation’s authors “blew” a “once-in-a-lifetime opportunity to streamline our crazy quilt of financial services regulators,” most notably by failing to merge “the SEC and CFTC to create one markets regulator.” Working alongside DOGE as well as artificial-intelligence and crypto czar David Sacks, Mr. Atkins has an opportunity to right this wrong. Let’s hope they don’t blow it.
The editorial points out one potential fly in the ointment – the crypto industry, which poured huge sums of money into Trump’s campaign, wants to make passage of the FIT21 legislation a top priority. That bill, which passed the House last summer, essentially divides regulatory responsibility for crypto between the SEC and the CFTC.
This division of authority means that both agencies will need to spend money ramping up to regulate their piece of the action and makes inter-agency turf battles almost inevitable. That’s not exactly a recipe for enhanced governmental efficiency. Accordingly, the editorial calls for Congress to merge the SEC and CFTC prior to enacting legislation providing a regulatory scheme for the crypto industry. That kind of delay is unlikely to sit well with the crypto crowd.
Former President Jimmy Carter passed away over the weekend, and as I read some of the tributes to him, I thought it might be interesting to see if I could find some information about how he dealt with the SEC during his tenure. What I found was a reminder of just how differently policy makers approached securities regulation during that era. Here’s an excerpt from an SEC Historical Society article on the agency’s evolution during the period from 1973-1981:
President Carter’s view of the SEC and its role as a regulator of the markets stands in sharp contrast to his other initiatives to regulate the economy. Although willing to consider price and wage controls, President Carter took a hands-off approach to the SEC.
His archives provide clues as to why he took that approach. The public worries about inflation meant that that issue would remain the single most important of his Presidency. But nearly as important was Carter’s belief that the SEC was a non-partisan agency, and that once he made his appointments, he should refrain from attempts to influence its policies. He respected the SEC and its staff and believed that the SEC and the markets could manage without his political influence and interference. After appointing [Harold] Williams as SEC Chairman, Carter remained mostly neutral on SEC regulatory matters.
In light of the increasing politicization of the securities regulation process that we’ve witnessed over the past couple of decades, Carter’s non-partisan, technocratic approach seems rather quaint. Even so, it’s an approach that I think we should aspire to return to – and putting a stop to the practice of using the agency to accomplish political goals that the party in power can’t achieve through legislation would be a good first step in that direction.
As we say farewell to a turbulent 2024 and turn the corner into the start of a new year, I wanted to pause for a moment to say “thank you” on behalf of our entire editorial team to all our readers for following our blogs, sharing tips on newsworthy topics, and gently pointing us in the right direction when we go astray. We wish everyone a peaceful and prosperous 2025. Our blogs will be back in the new year, but to help close this one out in style, here’s the University College Dublin Choral Scholars’ rendition of “Auld Lang Syne.”
It’s been a little over a year since the SEC’s requirement to disclose material cybersecurity incidents on Form 8-K went into effect, and this Paul Hastings report provides some insight into how companies have responded. The report reviewed 75 disclosures from 48 public companies over the past year, and here are some of the key findings:
– Since the SEC rules became effective, there has been a 60% increase in the number of cyber incidents disclosed by public companies.
– Fewer than 10% of the disclosed incidents include a description of the material impact of the incident. 78% of disclosures were made within eight days of discovery of the incident, with 42% of companies providing an update by issuing an updated Form 8-K after the initial disclosure.
– Third-party breaches had the widest ranging impact for public companies, with one in four breaches stemming from a third-party incident.
This excerpt from the report notes that threat actors are apparently “blowing the whistle” on companies that have been the victims of a cyber attack, but haven’t reported it:
In an aggressive move to pressure victims into paying ransoms, some threat actors have filed whistleblower reports with the SEC, claiming that companies have failed to report active incidents on Form 8-K. The threat actor then makes its “whistleblower” report public, attempting to publicly shame victims and encourage payment. While such tactics have failed each time, they have generated significant media attention, with over 40 news articles published in publications such as The Wall Street Journal, Bloomberg, Security Week and others.
FinCEN has posted its response to the latest decision from the 5th Circuit vacating its earlier stay of the district court’s preliminary injunction against enforcement of the Corporate Transparency Act. Here’s the gist of it:
On December 23, 2024, a panel of the U.S. Court of Appeals for the Fifth Circuit granted a stay of the district court’s preliminary injunction entered in the case of Texas Top Cop Shop, Inc. v. Garland, pending the outcome of the Department of the Treasury’s ongoing appeal of the district court’s order. FinCEN immediately issued an alert notifying the public of this ruling, and recognizing that reporting companies may have needed additional time to comply with beneficial ownership reporting requirements, FinCEN extended reporting deadlines.
On December 26, 2024, however, a different panel of the U.S. Court of Appeals for the Fifth Circuit issued an order vacating the Court’s December 23, 2024 order granting a stay of the preliminary injunction. Accordingly, as of December 26, 2024, the injunction issued by the district court in Texas Top Cop Shop, Inc. v. Garland is in effect and reporting companies are not currently required to file beneficial ownership information with FinCEN.
FinCEN notes that reporting companies are not subject to liability if they fail to make a beneficial ownership filing while the order remains in force, but they may continue to voluntarily submit beneficial ownership information reports.
If you’re in a jurisdiction that requires you to report your CLE compliance on a calendar year basis, then you may be scurrying around this week trying desperately to find the hours you need to get into compliance. I’ve been in that boat myself, and it’s made for some pretty long and boring New Year’s Eves. To make matters worse, I often ended up with some pretty irrelevant CLE courses to choose from, including such gems as “Litigating Truck Accidents in Ohio.”
If you’re looking for a more relevant way to pick up your CLE credits, check out our inventory of “on -demand” webcasts. These are eligible for credit in most states, and come in bite-sized, one-hour portions. Be sure to follow the instructions on the webcast’s home page in order to obtain credit. If you have questions about CLE credit, please visit our CLE FAQ page or contact our CLE provider: CEU Institute, accreditation@ceuinstitute.net.
Members of this site can access this content without any additional charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
If you just clicked through your email about this morning’s blogs, this isn’t the blog you were expecting – and it’s not the one I originally wrote, because developments on the CTA front are breaking fast and furious. On Monday, the 5th Circuit granted the DOJ’s request for a stay of a district court decision preliminarily enjoining enforcement of the Corporate Transparency Act on constitutional grounds. But that stay has now been vacated by a new 5th Circuit merits panel. Here’s a Bloomberg Tax article on the latest decision.
In response to the original 5th Circuit ruling granting the stay, FinCEN announced a brief extension of the January 1, 2025 filing deadline to January 13, 2025. FinCEN hasn’t yet posted anything in response to the latest ruling vacating the stay. Isn’t this fun? We’re posting law firm memos on the evolving drama in our “Beneficial Ownership” Practice Area.
I recently came across a new study on classified boards, and I thought the results were a little surprising. Although these structures are more common among younger companies, it turns out that they remain fairly prevalent throughout corporate America. Here’s an excerpt from a CLS Blue Sky Blog post by the authors of the study:
The conventional belief suggests that classified boards are disappearing from corporate America, particularly among well-established firms in the S&P 1500 Index. However, more recent findings indicate that young firms are increasingly likely to go public with a classified board and that, while the costs of having a classified board become significantly higher as firms mature, firms rarely opt to declassify their boards. We expand on these findings by examining a more comprehensive sample of firms over an extended period, uncovering new evidence of how and why the use of classified boards has evolved and its implications for shareholder value.
The study found that the prevalence of classified boards among S&P 1500 companies declined from 58% in the early 1990s to 31% in 2020, while the prevalence of classified boards outside the S&P 1500 rose from 42% to 52% over the same period. The study also found that as companies mature, they increasingly discard the classified board structure.
That wasn’t always the case. In the 1990s, the use of classified boards declined only slightly as firms matured, but that began to change during the first decade of this century, with the usage of staggered boards declining from 65% of the youngest firms to 46% among the most mature. That trend accelerated between 2011-2020 – while 73% of newly public companies had classified boards, only 33% of mature firms retained them.
