SEC Chair directs staff to consolidate rulemaking in light of the Holding Foreign Companies Accountable Act
On December 18, the Holding Foreign Companies Accountable Act was signed into law. The HFCAA, co-sponsored by Senators John Kennedy, a Republican from Louisiana, and Chris Van Hollen, a Democrat from Maryland, amends 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. The HFCAA also requires substantial action by the SEC to implement it. As I noted in my previous post about the bill (see this PubCo post), it was unclear how the bill would affect or interact with the proposal on this same topic that the SEC staff have been working on, which had been expected this month (see this PubCo post and this PubCo post). Now, SEC Chair Jay Clayton has issued a statement clarifying the situation.
Happy holidays everyone! Happy 2021!
2020 Working Group identifies best practices for virtual shareholder meetings
Just in time for the new proxy season comes this Report of the 2020 Multi-Stakeholder Working Group on Practices for Virtual Shareholder Meetings from the Rutgers Center for Corporate Law and Governance, the Council of Institutional Investors and the Society for Corporate Governance. The report is replete with helpful guidance, detailing best and emerging practices for virtual shareholder meetings. The Working Group updates its 2018 report (see this PubCo post) in light of the deluge of pandemic-induced VSMs that were convened during the 2020 proxy season. Sorry to say, but it seems likely that this new proxy season will see a repeat for the same reason—at least in the first part of the season—so this report should be especially useful.
Happy holidays everyone! Good riddance to 2020! Hooray for science and scientists!
SEC adopts final resource extraction disclosure rules
At an open meeting yesterday, the SEC adopted, by the usual three to two, final Rule 13q-1 and an amendment to Form SD to implement Section 1504 of Dodd-Frank, which relates to disclosure of payments by resource extraction issuers. These rules, last proposed almost exactly a year ago (see this PubCo post), have had a long and troubled history. This effort at new resource extraction disclosure rules represents the SEC’s third attempt at these rules—making their consideration a holiday tradition, according to SEC Commissioner Hester Peirce—and today is almost on target as the tenth anniversary of the original proposal. Will the third time be the charm? Even if you’re not remotely drawn to the subject matter of these rules, you might nevertheless find worthwhile the debate at the meeting about whether this rulemaking was appropriately within the remit of the SEC: was the mandate about informing and protecting investors, maintaining orderly markets or facilitating capital formation or was it rather about social policy unrelated—or at most distantly related—to the SEC’s core mission? Will the majority view on that question have any influence on future legislation?
EDGAR closed Christmas eve and Christmas day
The SEC has announced that, just like last year, the SEC’s EDGAR system will be closed on both Christmas eve, Thursday, December 24, 2020, and Christmas day, Friday, December 25, 2020.
SEC charges Sequential Brands with failure to take goodwill impairment charges
The SEC has just filed a complaint against Sequential Brands Group, Inc., a brand management company, for failing to take timely and appropriate goodwill impairment charges as required by GAAP and the federal securities laws, despite “clear evidence of goodwill impairment” (according to the press release). As a result, the SEC alleges, the company “materially understated its operating expenses and net loss and materially overstated its income from operations, goodwill, and total assets” in its SEC filings, turning “a net loss into income” for financial statement purposes.
SEC brings settled charges against GE for disclosure violations and inadequate accounting and disclosure controls
Right on the heels of the SEC’s action against Cheesecake Factory for misleading public statements regarding its financial performance (see this PubCo post) comes this settled action against General Electric Company—also for misleading public statements about its financial performance. In this action, the SEC alleged that GE failed to provide material information that would have allowed investors to understand how it was generating profits and cash flow in two key segments, power and insurance, the quality of those earnings and the underlying risks. And, as challenges in these segments were later disclosed, the company’s stock price fell almost 75%. As reported in the WSJ, the SEC and DOJ were “investigating GE’s accounting for about two years after the company disclosed large write-downs tied to its insurance business and its power business. The SEC had warned GE in September that it was preparing civil charges, and GE said it had set aside $100 million to resolve the matter.” That reserve turned out to be somewhat optimistic—a bit like some of GE’s insurance reserves—as the final civil penalty was actually $200 million. It’s worth noting here that, as stated in GE’s 8-K regarding the settlement, in its Order, the SEC “makes no allegation that prior period financial statements were misstated. This settlement does not require corrections or restatements of GE’s previously reported financial statements, and GE stands behind its financial reporting.” That is, in the end, the charges were not about funny accounting—even though some might question certain of the judgments—they were about the disclosures about the accounting, the controls over the accounting and the controls over the disclosures.
SEC brings first action for misleading disclosures regarding impact of COVID-19
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.”
SASB presents new bulletin on human capital disclosure
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.
SEC eliminates “competitive harm” requirement in streamlined process for confidential treatment
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.
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