NACD polls directors on reopening challenges and trends
To gain insight into the new governance challenges faced by boards over the next few months as companies begin a reopening and recovery process—hopefully a permanent one—the NACD undertook a pulse survey of 306 directors across multiple industries, conducted between May 14 and May 21. The survey revealed that directors expect the COVID-19 pandemic to have lasting effects—on business strategy, on the nature of work and on board-management interactions.
SEC Chair supports foreign companies delisting bill
In May, the Senate passed the Holding Foreign Companies Accountable Act, which would amend SOX to impose certain requirements on a public company that is audited by a registered public accounting firm with a branch or office located in a foreign jurisdiction that the PCAOB is “unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction.” And, as previously discussed, Nasdaq has also proposed rule changes aimed at addressing the same issue. (See this PubCo post.) A number of key players are speaking up to endorse these actions.
Failure to disclose perks continues to attract SEC Enforcement
All the focus on COVID-19 disclosures notwithstanding, the SEC has not taken its collective eyes off the basics. This Order discusses settled charges against Argo Group International Holdings, Ltd. related to its failure to disclose in its proxy statements—for five years—millions in personal expenses and perks paid to its CEO, such as personal use of corporate aircraft and cars, “personal services provided by Argo employees and watercraft-related costs.” Not to mention that the CEO was able to approve his own expense reports. According to the press release, Enforcement continues “to focus on whether companies are fully disclosing compensation paid to their top executives and have appropriate internal controls in place to ensure that shareholders receive information to which they are entitled.”
What’s the latest on virtual shareholder meetings?
It should come as no surprise that, in light of the COVID-19 pandemic, the number of virtual shareholder meetings this proxy season has jumped—off the page. But will this year’s broad experience leave companies wanting more? And will investor groups, which have tended to be skeptical of the virtual-only format, begin to view VSMs more favorably?
Auditors address non-GAAP financial measures in the context of COVID-19
Is EBITDAC a thing? Yes, according to the FT. This article describes the use of a new non-GAAP metric: “earnings before interest, tax, depreciation, amortisation—and coronavirus.” Applying the new metric, a few companies have actually added back profits they contend they would have earned but for the mandatory lockdowns resulting from COVID-19. Hmmm. While, according to the article, the add-back has “bemused some observers,” it does raise the question: how should companies employ non-GAAP financial measures (NGFMs) in the context of COVID-19? How should audit committees conduct oversight of the use of NGFMs that have been adjusted for coronavirus-related effects? Auditors weigh in.
SEC’s Investor Advisory Committee makes disclosure recommendations
At a meeting of the SEC’s Investor Advisory Committee last week, the Committee voted to make recommendations to the SEC on three topics: accounting and financial disclosure; ESG (environmental, social and governance) disclosure; and disclosure effectiveness. The ESG recommendation concluded that “the time has come for the SEC to address this issue,” and it should be no surprise that there was some controversy—including some dissenting votes—surrounding that recommendation. While recommendations from SEC advisory committees often hold some sway with the commissioners, given the long-held views of the current commissioners, it seems highly unlikely that the ESG recommendation will have much traction—at least not in the near term. The recommendations come as the membership of the committee undergoes a substantial shift as many members time out on their appointments. The recommendations are discussed below.
SEC adopts final amendments for M&A financial statement disclosure
Yesterday, once again without an open meeting, the SEC voted (with a dissent from Commissioner Allison Lee) to adopt amendments to the requirements for financial statements relating to acquisitions and dispositions of businesses. According to the press release, the amendments are intended to improve disclosure of financial information, facilitate more timely access to capital and reduce the complexity and costs to prepare the disclosure. The final amendments were adopted largely as proposed, but with some modifications to virtually every component of the proposal. Notably, as adopted, the final amendments modify the rules for determining whether an acquisition or disposition is significant and require companies to file the financial statements of acquired businesses for only up to the two most recent fiscal years, instead of the current three. In addition, the existing adjustment criteria for pro forma financial statements will be replaced with simplified requirements to depict the accounting for the transaction and, in response to some controversy over the proposal, provide the option to “depict synergies and dis-synergies of the acquisitions and dispositions for which pro forma effect is being given.” The final amendments will become effective on January 1, 2021. Companies may early adopt the final amendments, but only in their entirety.
Nasdaq proposes new rules to address emerging market listings; Holding Foreign Companies Accountable Act
Yesterday, the SEC formally announced its July 9 roundtable on emerging markets. In the announcement, the SEC observed that, “while the U.S. securities laws and regulations applicable to emerging market companies listed on U.S. exchanges are the same as (or comparable to) the laws and regulations applicable to U.S. public companies, the practical effects often are substantially different, based on the inability of U.S. regulators to inspect for compliance and enforce these rules and regulations.” In the meantime, Nasdaq appears to have taken the matter to the next level. Nasdaq’s three new proposals haven’t been posted by the SEC yet—so there may still be a lot of behind-the-scenes negotiation before they see the light of day on the SEC’s website—but they are clearly designed to address these concerns about emerging market issuers, especially lack of accounting controls and transparency. Not to be outdone, the Senate yesterday passed a bill that could bar from listing on U.S. exchanges companies audited by firms that the PCAOB is prohibited by foreign authorities from inspecting.
SEC Enforcement investigating potential federal securities law violations by PPP borrowers
It’s not just the Justice Department that’s looking into PPP loans—although there appears to be plenty of that going on—the SEC’s Division of Enforcement is also conducting an investigation into “Certain Paycheck Protection Program Loan Recipients” to determine whether there have been violations of the federal securities laws. To that end, Enforcement is conducting a “fact-finding inquiry,” requesting that certain PPP loan recipients produce a variety of documents. While the primary focus of DOJ prosecutors appears to be whether representations made in certifications to the SBA to obtain the PPP loans were fraudulent, the SEC is apparently looking at PPP loans and related company disclosures from a different angle.
SEC Chair Clayton addresses Financial Stability Oversight Council
At the end of last week, SEC Chair Jay Clayton addressed the Financial Stability Oversight Council, focusing on three areas: market function, market monitoring and corporate and other issuer disclosure. Early in his remarks, Clayton praised the efforts of FSOC “to preserve the flows of credit and capital in our economy[, which] have substantially mitigated the economic consequences of COVID-19.” He noted in particular that “the rapid fiscal, monetary and financial regulatory response to market and economic effects of COVID-19 has been both remarkable and appropriate.” However, it was the data he provided on market functioning and volatility that was most revealing.
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