At the end of last week, the SEC announced that it had filed settled charges against eight companies for failing to disclose in their Form 12b-25 filings (Form NT Notification of Late Filing) that their late filings of periodic reports were caused by an anticipated restatement or correction of prior financial reporting. The staff detected the violations through the use of data analytics in an initiative aimed at Form 12b-25 filings that were soon followed by announcements of financial restatements or corrections. According to Melissa Hodgman, the new (again) Acting Director of Enforcement (following the abrupt resignation of the prior Director), “[a]s today’s actions show, we will continue to use data analytics to uncover difficult to detect disclosure violations….Targeted initiatives like this allow us to efficiently address disclosure abuses that have the potential to undermine investor confidence in our markets if left unaddressed.” Is it just more “broken windows”? Maybe, maybe not. The Associate Director of Enforcement hit on a central problem from the SEC’s perspective with deficiencies of this type: “In these cases, due to the companies’ failure to include required disclosure in their Form 12b-25, investors relying on the deficient Forms NT were kept in the dark regarding the unreliability of the company’s financial reporting or anticipated material changes in operating results.” These charges should serve as a reminder that completing the late notification is not, to borrow a phrase, a trivial pursuit and could necessitate substantial time and attention to provide the narrative and quantitative data that, depending on the circumstances, could be required.
Public companies are required to file Forms 12b-25 when they are requesting additional time to file a periodic report. If the company was unable to file the periodic report on a timely basis without unreasonable effort or expense and complies with all of the requirements of the Rule, the late report will be deemed to be timely filed—essentially giving the company an extension.
More specifically, under Rule 12b-25, if a company fails to file a Form 10-K or 10-Q within the prescribed time period, the company must file a Form 12b-25 with the SEC no later than one business day after the report’s due date. The Form 12b-25 must disclose that the company is unable to timely file and explain the reason why. The company is also required to affirm that the periodic report will be filed within 15 calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the original due date, and is then required to file the report within that timeframe.
Importantly, for purposes of these charges, Form 12b-25 also requires the company to indicate whether it anticipates that “any significant change in results of operations from the corresponding period for the last fiscal year will be reflected by the earnings statements to be included in the subject report or portion thereof.” If so, the company must explain “the anticipated change, both narratively and quantitatively, and, if appropriate, state the reasons why a reasonable estimate of the results cannot be made.”
The various SEC orders found that each of the companies failed “to provide details disclosing that anticipated restatements or corrections were among the principal reasons for their late filings.” Instead, in a number of cases, the companies indicated that the reason for delay in filing was because the company was “still compiling information necessary to complete the preparation of its financial statements” or had “difficulty in completing and obtaining required financial and other information” or “has been unable to complete all aspects of its Form 10-Q.” Likely true statements, but not especially edifying, from the SEC’s perspective. Yet, in each case, the company announced a restatement or correction to its financial reporting within four to 14 days after it filed the Form 12b-25. The orders also found that each of the companies failed to disclose, “as required, that management anticipated a significant change in quarterly income or revenue.” In some cases, the companies also failed to timely file another form. The SEC found that the companies violated Section 13(a) and Rule 12b-25 under the Exchange Act. The penalties ranged from $25,000 to $50,000, depending of the number of violations.
For example, in the order against Asta Funding, Inc., in May 2020, Asta filed a Form 12b-25 disclosing that its Form 10-Q for its second fiscal quarter, ended March 31, 2020, would not be timely filed “due to delays experienced in the collection, compilation and analysis of certain information that may be included in the Quarterly Report.” Asta also affirmed that it would file the Form 10-Q within the five-day extension period and that it did not anticipate any significant change in results of operations from the corresponding period of the prior year. However, Asta did not file the 10-Q for nine days after the five-day extension period had ended. What’s more, the 10-Q disclosed that, during the preparation of its 10-Q, Asta “determined that certain adjustments were needed to correct the previously issued September 30, 2019 consolidated financial statements. Specifically, management determined that it had understated its income taxes payable and related income tax expense from foreign operations and understated accrued professional fees and related professional fee expense as of and for the year ended September 30, 2019.” According to the SEC’s order, “Asta’s inability to meet the filing deadline for its second-quarter FY2020 Form 10-Q was due, in large part, to the discovery, and ongoing correction, of errors in its FY2019 year-end financial statements. In its Form 12b-25, however, Asta failed to disclose this information and failed to provide the detailed narratives and quantitative explanation specifically called for by the form. The company anticipated that its second-quarter FY2020 financial results, when reported, would differ significantly from its second-quarter FY2019 financial results, including a 26% decrease in quarterly revenue and a 96% decrease in quarterly income before income tax versus second quarter FY2019.” The SEC determined that Asta had violated Section 13(a) of the Exchange Act and Rule 12b-25 and required Asta to pay a civil money penalty of $50,000.