In its first action against a public company for misleading investors about the financial effects of the pandemic, the SEC has announced settled charges against The Cheesecake Factory. In mid-March, the company, which operates a chain of restaurants, was compelled as a result of COVID-19 to temporarily change its business model from dine-in restaurants to “an ‘off-premise model’ (i.e., to-go and delivery).” The company then issued two press releases (furnished to the SEC on Form 8-K) advising of the transition and indicating that the new model was “enabling the Company’s restaurants to operate sustainably at present under this current model,” but failed to disclose that the claim of sustainable operations excluded expenses attributable to corporate operations as well as the weekly loss of $6 million in cash. Those statements, the SEC concluded, were “materially false and misleading.” According to SEC Chair Jay Clayton, “[a]s our local and national response to the pandemic evolves, it is important that issuers continue their proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations. It is also important that issuers who make materially false or misleading statements regarding the pandemic’s impact on their business and operations be held accountable.”
In August, the SEC amended the Reg S-K disclosure requirements related to the descriptions of business, legal proceedings and risk factors. Probably the most significant change was the enhancement of the disclosure requirement for human capital, a topic that has recently been front-burnered by the impact of COVID-19 on the workforce. The amended rule requires companies to disclose, to the extent material, information about human capital resources, including any human capital measures or objectives that the company focuses on in managing the business. The new human capital disclosure requirement largely reflects the SEC’s historic “commitment to a principles-based, registrant-specific approach to disclosure” that is “rooted in materiality.” (See this PubCo post.) To emphasize that the requirement was “principles-based” did not mean that disclosure of vague generalities would suffice. Rather, in his Statement regarding the amendments, SEC Chair Jay Clayton remarked that, while the SEC was not prescribing “specific, rigid metrics,” under the principles-based approach, he did “expect to see meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.” Although the principles-based approach offers the benefit of flexibility to allow disclosure to be adapted to each company, nevertheless, the absence of any prescriptive element left many companies searching for how best to address human capital disclosure. Now, independent standard-setting organization SASB, the Sustainability Accounting Standards Board, has issued a Human Capital Bulletin that summarizes the elements of the SASB Standards that relate to human capital and provides an overview of selected human capital-related topics and metrics that apply across all 77 SASB industry standards.
So here’s a nugget that is buried in the SEC’s new adopting release on harmonization of the private offering exemptions (see this PubCo post): amendments to Reg S-K Item 601 to “adjust” the exhibit filing requirements related to confidential treatment by removing the competitive harm requirement in light of the SCOTUS decision in Food Marketing Institute v. Argus Leader Media. (See this PubCo post.) What in the world does that have to do with harmonizing private offering exemptions, you ask?
House passes Holding Foreign Companies Accountable Act; bill now sent to President for signature (updated)
For over a decade, the PCAOB has been unable to fulfill its SOX mandate to inspect audit firms in “Non-Cooperating Jurisdictions,” including China. To address this issue, in May, the Senate passed, by unanimous consent, the Holding Foreign Companies Accountable Act, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland. The bill would amend SOX to prohibit trading on U.S. exchanges of public reporting companies audited by registered public accounting firms that the PCAOB has been unable to inspect for three sequential years. Yesterday, the House also passed the bill, with the result that it is now headed to the President for signature. [Update: This bill was signed into law on December 18.] How this bill will affect or interact with the expected proposal on this topic from the SEC (see this PubCo post) remains to be seen.
Yesterday, Nasdaq announced that it has filed with the SEC a proposal for new listing rules regarding board diversity and disclosure. If approved, it would likely be a game changer. The new listing rules would adopt a “comply or explain” mandate for board diversity for most listed companies and require companies listed on Nasdaq’s U.S. exchange to publicly disclose “consistent, transparent diversity statistics” regarding the composition of their boards. The announcement indicates that the goal is to “provide stakeholders with a better understanding of the company’s current board composition and enhance investor confidence that all listed companies are considering diversity in the context of selecting directors, either by including at least two diverse directors on their boards or by explaining their rationale for not meeting that objective.” In its 271-page filing, Nasdaq explains its rationale by presenting an analysis of over two dozen studies that “found an association between diverse boards and better financial performance and corporate governance.” According to Nasdaq’s President and CEO, Adena Friedman, “Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies….Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”
[This post revises and updates my earlier post primarily to reflect the contents of the adopting release.]
By a vote of three to two, the SEC has adopted new amendments to simplify, modernize and enhance Management’s Discussion and Analysis of Financial Condition and Results of Operations and the other financial disclosure requirements of Regulation S-K. The amendments were adopted largely as proposed in January, with some modifications intended to address comments received. Once again, like other recent rulemakings, these amendments tilt toward a more principles-based, company-specific approach, highlighting the importance of materiality and trend disclosures. MD&A discussions have long been the subject of criticism as too mechanical, with companies sometimes chided for just “doing the math” without more. A new provision describes the objectives of MD&A with the goal of encouraging a more thoughtful, less rote MD&A and allowing investors a better view of the company from management’s perspective. In some cases, the amendments eliminate prescriptive requirements in favor of more general disclosures that are integrated into the primary discussions. And some of the proposed changes are fairly dramatic—such as eliminating selected financial data and the Table of Contractual Obligations, and streamlining the requirement to disclose Supplementary Financial Information. Companies may also find the new explicit mandate to discuss critical accounting estimates to be a challenge. Whether the changes result in more nuanced, analytical disclosure remains to be seen. The amendments will become effective 30 days after publication in the Federal Register.
Included at the end of this post is a version of the SEC’s table of changes.