Officials at the SEC all seem to be singing the same tune these days, emphasizing the need to amp up company disclosures regarding Brexit, the LIBOR phase-out and cybersecurity. As reported by the WSJ, Corp Fin Chief Accountant Kyle Moffatt, speaking at the FEI Current Financial Reporting Issues Conference, echoed the earlier informal guidance provided by SEC Chair Jay Clayton, Corp Fin Director William Hinman and Deputy Director Shelley Parratt that the SEC will be looking for enhanced disclosure on these topics where material. (See this PubCo post.) Given the onslaught of admonitions, companies would be well advised to pay attention.
As the article observes, a draft deal was reached on the Brexit breakup on Tuesday, but, with no guarantees that the deal will be supported by Parliament or even by Prime Minister Theresa May’s cabinet, the uncertainty concerning Brexit and its potential impact continues. Moffatt cautioned that the “‘staff will be thinking and looking hard at tailored disclosure describing not only those risks associated with Brexit but also the potential impact on the business. It needs to be clear. It needs to be concise. And if there’s going to be an impact, then it definitely should be discussed and it should be discussed in detail.’” Speaking a day earlier at the same conference, Clayton had advised the audience that the SEC is “sharpening its focus on corporate disclosures about the risks associated with the U.K.’s exit from the European Union….‘My personal view is that the potential impact of Brexit has been understated….I would expect companies to be looking at this closely and sharing their views with the investment community.’” (See this PubCo post.)
With regard to the need for improved cybersecurity disclosure, Moffatt urged companies to align their disclosure practices with the SEC’s recent cybersecurity disclosure guidance. (See this Cooley Alert.) According to the WSJ, Moffatt cited in particular the need to discuss board risk oversight, disclosure controls and procedures and insider trading policies in the context of cybersecurity, a message consistent with the one previously delivered by Hinman and Parratt. In addition, he advised that the “‘biggest key is making sure that there are procedures in place to make sure that the information is provided to all levels, all relevant levels, of management, so everyone is aware of what’s happened and so that those issues can be addressed.’” And, as Hinman and Parratt likewise observed, “if SEC staff learn about a cyber incident from the media, they may reach out to companies directly to better understand the disclosure or the lack of disclosure, Mr. Moffatt said.”
Another issue that Moffatt indicates should be analyzed for disclosure is the LIBOR phase-out, which is expected to occur in 2021. LIBOR, the London Interbank Offered Rate, as reported in the Economist, “underpins $260trn of loans and derivatives, from variable-rate mortgages to interest-rate swaps.” A benchmark interest rate, LIBOR “is based on a panel of banks submitting estimates of their own borrowing costs. The rigging scandals that made LIBOR notorious in 2012 showed how this process could be manipulated.” As a result, British financial regulators decided to phase it out. According to the WSJ, Moffatt indicated that “there are significant uncertainties surrounding legacy financial instruments that rely on Libor and how the switch to another benchmark for these instruments may affect the reporting company’s hedge accounting….‘To the extent that the phaseout of Libor is material to a company,…we would definitely expect a company to disclose that fact and describe the implications of the phaseout, including any associated risks, to investors.’”
Moffatt also warned that companies must regularly update their disclosures to reflect changes in facts and circumstances: “‘With respect to both Libor and Brexit, the other thing to keep in mind is your disclosures need to evolve,’ Mr. Moffatt said. ‘Every quarterly period or annual period you need to make sure that you reassess your disclosure and add any updates.’”
As reported by BNA, at the same conference, Moffatt also reiterated the familiar cautionary refrain about the use of non-GAAP financial measures that could be misleading to investors. The hot button these days seems to be individually tailored performance measures—especially those that are unusual and complex—the prime target apparently being “adjusted revenue.” The article reports that, while the practice “might not be widespread,” SEC officials said that they are “seeing it occur among the financial statements of public companies, just as accounting rulemakers are instituting sweeping new standards for the reporting of revenue, leases, loan losses, and insurance.”