SEC issues staff report on definition of accredited investor
On Friday, the SEC announced the issuance of a staff report on the accredited investor definition, a review that, as directed by Dodd-Frank, occurs every four years with the objective of assessing “whether the requirements of the definition should be adjusted or modified for the protection of investors, in the public interest, and in light of the economy.” As described in the report, this review is “focused on changes in the composition of the accredited investor pool since the definition was adopted; the extent to which accredited investors have the financial sophistication, ability to sustain the risk of loss of investment, and access to information that have traditionally been associated with an ability to fend for themselves; and accredited investor participation in the Regulation D market and the market for exempt offerings more generally.” The report examines the history of the accredited investor definition and changes in the economic landscape that might affect the composition of the pool of accredited investors and describes historical comments and recommendations for changes to the accredited investor definition. However, unlike the staff’s 2015 report (see this PubCo post), this report did not make any recommendations regarding changes to the definition and instead simply welcomed public input. Public comment may be particularly impactful this year given that, according to the SEC’s most recent reg-flex agenda, Corp Fin is considering recommending that the SEC propose amendments to Reg D, including updates to the accredited investor definition and to Form D, “to improve protections for investors.” The target date for a proposal is April 2024.
Corp Fin adds one more new CDI on Form 8-Ks for material cybersecurity incidents
A few days ago, Corp Fin issued three new CDIs relating to delays in reporting material cybersecurity incidents on Form 8-K. Those CDIs, together with the Department of Justice Material Cybersecurity Incident Delay Determinations, addressed questions related to the Attorney General’s determination—or not—that disclosure of the incident on Form 8-K would pose a substantial risk to national security or public safety. (See this PubCo post.) Yesterday afternoon, Corp Fin added a new CDI on a closely related topic—the impact of a DOJ consultation on a determination, for reporting purposes, about the materiality of the incident itself. As Corp Fin Director Erik Gerding observed in a speech yesterday on cybersecurity disclosure, the CDI was intended to ensure that companies are not deterred from consulting with the DOJ or other national security agencies. The new CDI can be found under the caption Exchange Act Forms, in Section 104B, Item 1.05 Material Cybersecurity Incidents. A summary is below, but the CDI number is linked to the CDI on the SEC website, so you can easily read the version in full.
Corp Fin issues new CDIs on delaying Form 8-Ks for material cybersecurity incidents
Corp Fin has just released some new CDIs, summarized below, relating to material cybersecurity incidents. As you know, in July, the SEC voted, three to two, to adopt final rules on cybersecurity disclosure, which includes a requirement for material incident reporting on Forms 8-K and 6-K. Compliance with the 8-K and 6-K incident disclosure requirements will be required for all companies other than smaller reporting companies beginning on December 18, 2023. SRCs will have an additional 180 days deferral. (See this PubCo post.) The new CDIs can all be found under the caption Exchange Act Forms, in a new Section 104B, Item 1.05 Material Cybersecurity Incidents. Summaries are below, but each CDI number is linked to the CDI on the SEC website, so you can easily read the version in full.
The CAQ has some ideas for improving audit committee disclosure
The Center for Audit Quality, working with Ideagen Audit Analytics, has just released a new edition of its annual Audit Committee Transparency Barometer, which, over the past ten years, has measured the robustness of audit committee disclosures in proxy statements among companies in the S&P Composite 1500. Why is that important? According to the CAQ, “numerous studies have identified a positive correlation between increased communication of audit committee oversight through disclosures in the proxy statement and increased audit quality.” Not to mention the interest of investors and other stakeholders in better disclosure. The bottom line, according to the CAQ, is that the level of voluntary transparency has continued to increase steadily in most core areas of audit committee responsibility, such as oversight of the external auditor, as well as in evolving areas, such as cybersecurity risk and ESG. But it could still stand some improvement. In light of the “current environment of economic uncertainty, geopolitical crises, and new ways of working,” the CAQ encourages audit committees to jettison boilerplate and “tell their story through tailored disclosures in the proxy statement…. For audit committees to enhance their disclosures, they should provide further discussion not just of what they do in their oversight of the external auditor but also how they do it.” In the Barometer, the CAQ offers some specific ideas on just how audit committees can improve their disclosure and enhance its utility.
SEC’s Fall 2023 Reg-Flex Agenda is out—climate disclosure rules delayed again
The SEC’s Fall 2023 Reg-Flex Agenda—according to the preamble, compiled as of August 22, 2023, reflecting “only the priorities of the Chair”—has now been posted. And it’s Groundhog Day again. All of the Corp Fin agenda items made an appearance before on the last agenda and, in most cases, several agendas before that. Do I hear a sigh of relief? Of course, the new agenda is a bit shorter than the Spring 2023 agenda, given the absence of regulations that have since been adopted, including cybersecurity risk governance (see this PubCo post) and modernization of beneficial ownership reporting (see this PubCo post). At first glance, the biggest surprise—if it’s on the mark, that is—is that the target date for final action on the SEC’s controversial climate disclosure proposal has been pushed out until April 2024. Keep in mind that it is only a target date, and the SEC sometimes acts well in advance of the target. For example, the cybersecurity proposal had a target date on the last agenda of October 2023, but final rules were adopted much earlier in July. I confess that my hunch was that we would see final rules before the end of this year, but adoption this year looks increasingly unlikely (especially given that the posted agenda for this week’s open meeting does not include climate). Not surprisingly, there’s nothing on the agenda about a reproposal of the likely-to-be vacated (?) share repurchase rules, although, at the date that the agenda was compiled, the possibility of vacatur was not yet known. (See this PubCo post.) Describing the new agenda, SEC Chair Gary Gensler observed that “[w]e are blessed with the largest, most sophisticated, and most innovative capital markets in the world. But we cannot take this for granted. Even a gold medalist must keep training. That’s why we’re updating our rules for the technology and business models of the 2020s. We’re updating our rules to promote the efficiency, integrity, and resiliency of the markets. We do so with an eye toward investors and issuers alike, to ensure the markets work for them and not the other way around.”
FASB issues final ASU requiring enhanced disclosure of segment expenses
The FASB has announced a final Accounting Standards Update designed to improve disclosures about public companies’ reportable segments, particularly disclosures about significant segment expenses—information that the FASB says investors frequently request. The ASU indicates that investors and others view segment information as “critically important in understanding a public entity’s different business activities. That information enables investors to better understand an entity’s overall performance and assists in assessing potential future cash flows.” According to FASB Chair Richard R. Jones, the “new segment reporting guidance is based on the FASB’s extensive outreach with stakeholders, including investors, who indicated that enhanced disclosures about a public company’s segment expenses would enable them to develop more decision-useful financial analyses….It will improve financial reporting by providing additional information about a public company’s significant segment expenses and more timely and detailed segment information reporting throughout the fiscal period.” Previously, at the proposal stage, Jones had referred to the ASU as the “FASB’s most significant change to segment reporting since 1997.” While the extent of new information will vary among entities, the FASB “expects that nearly all public entities will disclose new segment information under the amendments.” It’s worth pointing out here that the financial reporting changes could well lead to changes in MD&A disclosure. The ASU will apply to all public entities required to report segment information (under Topic 280). Compliance with the new guidance will be required starting in annual periods beginning after December 15, 2023.
SEC Chief Accountant has some thoughts about the statement of cash flows
The SEC’s Office of Chief Accountant appears to be taking a hard look these days at statements of cash flows. In “The Statement of Cash Flows: Improving the Quality of Cash Flow Information Provided to Investors,” SEC Chief Accountant Paul Munter discusses the importance of the statement of cash flows, the failure of companies and auditors to prepare and review cash flows statements with an appropriate level of care and the mischaracterization of classification errors on the cash flows statement as immaterial, resulting in questionable “little r” restatements. Munter cautions that “preparers and auditors may not always apply the same rigor and attention to the statement of cash flows as they do to other financial statements, which may impede high quality financial reporting for the benefit of investors.” According to Munter, that conclusion is evidenced by both the prevalence of restatements associated with the statement of cash flows as well as by the staff’s “observations of material weaknesses in internal control over financial reporting…around the preparation and presentation of the statement of cash flows.” It’s worth noting here that, as reported by the WSJ, other SEC representatives have also been raising these same issues at conferences regarding inadequate attention to the statement of cash flows and lack of objectivity in assessing the materiality of cash flow errors. Statements like this one from the Chief Accountant and others at OCA usually warrant close attention because they signal topics on which the staff is focused and often presage Enforcement activity on these same subjects.
Future of SEC’s ALJs looks bleak—but the administrative state? Not so much
Last week, SCOTUS heard oral argument in Jarkesy v. SEC (BTW, pronounced Járk?z?, according to his counsel). As you may have heard, that case is about the constitutionality of the SEC’s administrative law judges. There were three questions presented, and Jarkesy had been successful in the appellate court on all three:
“1. Whether statutory provisions that empower the Securities and Exchange Commission (SEC) to initiate and adjudicate administrative enforcement proceedings seeking civil penalties violate the Seventh Amendment.
2. Whether statutory provisions that authorize the SEC to choose to enforce the securities laws through an agency adjudication instead of filing a district court action violate the nondelegation doctrine.
3. Whether Congress violated Article II by granting for-cause removal protection to administrative law judges in agencies whose heads enjoy for-cause removal protection.”
While, on its face, the case may not have much allure, it has the potential to be enormously important in limiting the power of the SEC and other federal agencies. That’s especially true if SCOTUS broadly decides that the statute granting authority to the SEC to elect to use ALJs violates the nondelegation doctrine. This case, together with the two cases to be heard in January addressing the continued viability of Chevron deference (see this PubCo post), could go far to upend the “administrative state.” And, for those justices with a well-known antipathy to the administrative state, that might be their ultimate goal. (See, for example, the dissent of Chief Justice Roberts in City of Arlington v. FCC (2013), where he worried that “the danger posed by the growing power of the administrative state cannot be dismissed.”) During the over two-hour oral argument, however, the discussion was focused almost entirely on the question of whether the SEC’s use of an ALJ deprived Jarkesy of his Seventh Amendment right to a jury trial—certainly an important issue with possibly far-reaching implications across federal agencies. But what was most conspicuous—and perhaps most consequential—was what was not discussed: the nondelegation doctrine. In case I missed it, I searched the 170-page transcript and found the word “nondelegation” only once and that from the lips of SEC counsel. While, at the end of the day, the Court’s opinion could certainly go in a different direction, the oral argument did not leave the impression that the end of the administrative state is nigh—not as result of this case, at least.
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