You might recall that, in April of this year, SEC Commissioner Robert Jackson co-authored an op-ed (with Robert Pozen, MIT senior lecturer and former president of Fidelity) that lambasted the use of non-GAAP financial metrics in determining executive pay, absent more transparent disclosure. The pair argued that, although historically, performance targets were based on GAAP, in recent years, there has been a shift to using non-GAAP pay targets, sometimes involving significant adjustments that can “be used to justify outsize compensation for disappointing results.” On the heels of that op-ed came a rulemaking petition submitted by the Council of Institutional Investors requesting, in light of this increased prevalence, that the SEC amend the rules and guidance to provide that all non-GAAP financial measures (NGFMs) used in the CD&A of proxy statements be subject to the reconciliation and other requirements of Reg G and Item 10(e) of Reg S-K. But how pervasive is the use of NGFMs in executive comp? This article from Audit Analytics puts some additional data behind the brewing controversy about the use of non-GAAP financial measures in executive comp—and the level of increase is substantial.
The SEC has adopted final amendments to the auditor independence rules relating to lending relationships between the auditor and an audit client or certain shareholders of the audit client. As noted in the press release, the SEC had become aware of circumstances where the existing rules captured attenuated “relationships that otherwise do not bear on the impartiality or objectivity of the auditor. The amendments are intended to focus the rules on those lending relationships that reasonably may bear on external auditors’ impartiality or objectivity and, in so doing, improve the application of the Loan Provision for the benefit of investors while reducing compliance burdens.” Although the issues associated with this independence rule have created the severest compliance challenges for companies in the investment management industry, the final amendments will apply to entities beyond that industry, including operating companies and registered broker-dealers. The final amendments will become effective 90 days after publication in the Federal Register.
Under PCAOB Rule 3520, the auditor “must be independent of the firm’s audit client throughout the audit and professional engagement period,” which includes satisfying the independence criteria of the SEC and the PCAOB. But what happens when the auditor violates one of the independence rules—let’s say one of the specific prohibitions under Rule 2-01(c) of Reg S-X? Can the auditor’s violation be “cured”? Can the auditor still affirm its independence? How is that determined?
SEC proposes narrow carve-out to exempt low-revenue smaller reporting companies from the SOX 404(b) auditor attestation requirement (UPDATED)
[This post has been updated primarily to reflect the contents of the proposing release as well as the statement of Commissioner Hester Peirce.]
Those of you who expected the SEC to go big and propose raising the current threshold for status as an “accelerated filer” to be commensurate with the cap for “smaller reporting companies” will be sorely disappointed, as will anyone looking for regulatory simplification and harmonization. Nevertheless, the SEC did address the big elephant in the room—the SOX 404(b) auditor attestation requirement—with a measured, narrowly tailored exception that attempted to thread the needle with regard to the controversy over exempting additional companies from SOX 404(b), viewed by some as a critical investor protection. However, the resulting framework proposed for determining filer categories and requirements adds another layer of complexity to the current labyrinth, including some rather head-spinning new transition provisions. Will anyone—other than low-revenue smaller reporting companies—be happy with the result?
SEC proposes narrow carve-out to allow low-revenue smaller reporting companies to avoid SOX 404(b) auditor attestation requirement
Those of you who expected the SEC to go big and propose raising the current threshold for status as an “accelerated filer” to be commensurate with the cap for “smaller reporting companies” will be sorely disappointed. Nevertheless, the SEC did address the big elephant in the room—SOX 404(b)—with a narrowly tailored exception.
At an open meeting this morning, the SEC voted (by a vote of three to two, with Commissioner Robert Jackson dissenting) to propose amendments to the accelerated filer and large accelerated filer definitions that provide a narrow carve-out from these definitions for companies that qualify as smaller reporting companies and reported less than $100 million in annual revenues in the most recent fiscal year for which audited financial statements were available. As a result, if the proposal were adopted, those companies would no longer need to comply with the shorter timeframes applicable to accelerated filers and large accelerated filers for filing periodic reports. And, most significantly, the proposed revision would mean that those companies qualifying for the carve-out would no longer be subject to the SOX 404(b) auditor attestation requirement, which has been anathema to many deregulation advocates. Notably, companies with a public float between $75 million and $250 million would still be subject to the accelerated filer requirements unless their revenues were under the $100 million revenue cap. The proposal, which has not yet been posted, would also increase from $50 million to $60 million the transition thresholds for accelerated and large accelerated filers to become a non-accelerated filer and increase the threshold for exiting large accelerated filer status from $500 million to $560 million. In addition, the proposal would add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status. (Here is the press release.) There is a 60-day comment period. (The proposing release has just now been posted. Check this space for updates.)
This is National Small Business Week and, to kick things off, the SEC today held a brief roundtable featuring representatives of small business and investment funds in a discussion of the challenges of raising funding outside of the four key tech hotspots (San Francisco, San Jose, Boston and NYC) as well as other challenges associated with public company status as a small business. After the roundtable, the SEC’s Small Business Capital Formation Advisory Committee held its inaugural meeting. At the meeting, Corp Fin Director Bill Hinman discussed the SEC’s agenda (including the upcoming proposal that could limit the application of the SOX 404(b) auditor attestation requirement).
his morning, once again without an open meeting—whatever happened to government in the sunshine?—the SEC voted to propose amendments intended to improve the disclosure requirements for financial statements relating to acquisitions and dispositions of businesses. According to the press release, the proposed changes are designed to “improve for investors the financial information about acquired and disposed businesses; facilitate more timely access to capital; and reduce the complexity and cost to prepare the disclosure.” The proposal will be open for public comment for 60 days.