Will the SEC beat the clock on the Gensler agenda?
In an article in 2022, Politico reported that SEC Chair Gary “Gensler has come under fire for the pace of rulemaking coming out of the agency, with critics claiming that dissecting the flood of new proposals in such short periods of time is impractical. Gensler has pointed out that the number of proposals [is] largely on par with what former SEC chairs like Clayton have done. The latest proposals have just been more clustered than in the past, Gensler said.” That’s a response that I’m sure I’ve heard any number of times during Congressional hearings. Is that still the case? To find out, Bloomberg performed a count of SEC records from 2001 to 2023 to assess the extent of rulemaking in the first two years, four months and one week into the tenures of several of the SEC Chairs over that period who were confirmed to lead the SEC at the start of a new administration. The answer? Yes and no. According to Bloomberg, the “SEC under Chair Gary Gensler is issuing regulations at its slowest pace in decades for a new presidential administration,” having adopted just 22 final rules since his tenure began in 2021. By comparison, over the same periods, the SEC under Jay Clayton had adopted 25 final rules, under Mary Schapiro, 28 rules, and under Harvey Pitt, a whopping 34 rules (many implementing the SOX mandate). So were all the complaints about the tsunami of rulemaking just misguided? Not exactly. As Bloomberg notes, “[d]espite trailing his recent predecessors on final rules, Gensler’s proposal tally of 49 exceeds Clayton’s 28 and Pitt’s 48, but is less than Schapiro’s 65.” [Emphasis added.] For the agenda of the Gensler administration, that leaves quite a chasm at this point between rules that are final and rules that are just proposed. What might that mean for SEC priorities? Bloomberg takes a deep dive.
New CDIs on stock buybacks and foreign private issuers
In May, the SEC adopted a proposal intended to modernize and improve disclosure regarding company stock repurchases. One fortunate aspect of the final rules—for domestic companies, that is—was that the new rule did away with the proposed new Form SR for reporting of daily repurchase data by domestic companies and, instead, moved to quarterly reporting of detailed quantitative information on daily repurchase activity, to be filed as exhibits to companies’ periodic reports. But that was not the case for foreign private issuers. The final rules require FPIs that report on FPI forms to disclose daily quantitative repurchase data at the end of every quarter on new Form F-SR, due 45 days after the end of the FPI’s fiscal quarter. Some commenters on the proposal had suggested exempting FPIs that already make repurchase disclosure under home-country rules, but the SEC elected not to do so in light of its view that the detailed disclosure would be beneficial for all investors in companies that conduct repurchases. The SEC noted, however, that, if an FPI’s home country disclosures furnished on Form 6-K satisfy the Form F-SR requirements, it can incorporate those disclosures by reference into its Form F-SR. (See this PubCo post.)
Now, Corp Fin has issued three new CDIs, summarized below, related to new Form F-SR addressing reporting in the absence of repurchases and reporting for the final fiscal quarter.
SEC Chief Accountant warns against narrow focus in risk assessments
In this Statement, The Importance of a Comprehensive Risk Assessment by Auditors and Management, SEC Chief Accountant Paul Munter cautions auditors and company managements against conducting risk assessments that focus too narrowly “on information and risks that directly impact financial reporting, while disregarding broader, entity-level issues that may also impact financial reporting and internal controls.” Similarly, auditors and managements may sometimes dismiss isolated incidents, perhaps as a result of confirmation bias, without adequately analyzing whether these issues might be indicative of larger issues that require responsive action and disclosure. Munter warns that “[s]uch a narrow focus is detrimental to investors as it can result in material risks to the business going unaddressed and undisclosed, thereby diminishing the quality of financial information.” Management, Munter warns, must “take a holistic approach when assessing information about the business and avoid the potential bias toward evaluating problems as isolated incidents, in order to timely identify risks, including entity-level risks.” Managements and audit committees may want to take note.
You might want to think twice before describing pending litigation as “without merit”
There’s definitely a lesson to be learned from this recent case from the Massachusetts Federal District Court, City of Fort Lauderdale Police & Firefighters’ Ret. Sys. v. Pegasystems Inc.: companies making public statements about pending litigation should be very cautious when characterizing their views on the merits or prospects of that litigation. There may well be occasions when describing litigation as “without merit” may be, well, merited. But companies should keep in mind that claiming that a complaint against the company is “without merit”—as companies often do—may just shake up a whole new hornets’ nest, as it did in this case. (Hat tip to The 10b-5 Daily.)
Corp Fin issues some new CDIs on Rule 10b5-1 plans
On Friday afternoon, Corp Fin issued several new CDIs regarding Rule 10b5-1 plans. As you may recall, in December last year, the SEC adopted new amendments to the rules regarding Rule 10b5-1 plans. These amendments added new conditions to the affirmative defense of Rule 10b5-1(c) designed to address concerns about abuse of the rule by opportunistic trading on the basis of material non-public information. Among other changes, Rule 10b5-1(c)(1) was amended to apply a cooling-off period to persons other than the issuer, impose a good-faith certification requirement on directors and officers, limit the ability of persons other than the issuer to use multiple overlapping Rule 10b5-1 plans, limit the use of single-trade plans by persons other than the issuer to one single-trade plan in any 12-month period, and add a condition that all persons entering into Rule 10b5-1 plans must act in good faith with respect to those plans. In addition, the amendments included requirements for new disclosures regarding (1) companies’ insider trading policies and procedures; (2) director and officer equity compensation awards made close in time to company to disclosure of MNPI; (3) adoption or termination by officers of directors of any 10b5-1 plan or “non-Rule 10b5-1 trading arrangement”; and (4) bona fide gifts of securities on Forms 4 by Section 16 filers and transactions under 10b5-1 plans on Forms 4 and 5. ) (See this PubCo post.)
The new CDIs, summarized below, address calculation of the cooling-off period, overlapping plans involving 401(k) plans, the new Form 4 checkbox and disclosures about adoption and termination of trading arrangements.
SEC increases fee rates for fiscal 2024, which begins October 1, 2023
Today, the SEC announced a pretty steep fee increase for issuers registering their securities. In fiscal 2024, the fee rates for registration of securities and certain other transactions will be $147.60 per million dollars, up from $110.20 per million dollars last year.
SEC finds Forms 12b-25 not up to snuff
Earlier this week, the SEC announced settled enforcement actions against five companies for deficient disclosure in Forms 12b-25 that they filed regarding late reports. Why? On the heels of filing those Forms 12b-25, the companies announced financial restatements or corrections that were not even alluded to in those late notification filings. Over two years ago, the SEC charged eight companies for similar violations detected 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. (See this PubCo post.) Apparently, the SEC believes that companies are still flubbing this one and does not seem to consider these errors to be just harmless foot faults. In connection with the 2021 enforcement actions, 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.
In discussions of inflation, SEC staff want the details
According to a review of SEC staff comments by Bloomberg, Corp Fin staff have been weighing in to remind companies about the need to discuss, in SEC filings, the material impact of inflation—and don’t forget the details. No doubt you remember that Item 303 of Reg S-K used to include an express requirement to discuss the impact of inflation and changing prices on net sales, revenues and income from continuing operations, but that provision was eliminated as part of the MD&A modernization project in 2020. (See this PubCo post.) Of course, at that point we hadn’t had any real inflation for years. Then the SEC removed the explicit requirement and what do we have? Inflation, of course—up to 9% in June 2022.
New Cooley Alert: EU Adopts Long-Awaited Mandatory ESG Reporting Standards
As discussed in this excellent new Cooley Alert, EU Adopts Long-Awaited Mandatory ESG Reporting Standards, in January 2023, the European Union adopted the Corporate Sustainability Reporting Directive, which requires EU and non-EU companies that meet certain EU activity thresholds to file annual sustainability reports alongside their financial statements. These reports must be prepared in accordance with European Sustainability Reporting Standards, the first set of which were just adopted by the European Commission on July 31, 2023 and will soon become law and apply directly in all 27 EU member states (but not in the UK). Companies will need to report in compliance with these new ESRS as early as 2025 for the 2024 reporting period (and note that large EU subsidiaries of non-EU companies that meet certain criteria will need to report in 2026 for the 2025 reporting period).
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