Late Friday, the SEC announced that its Spring 2021 Regulatory Flexibility Agenda—both short-term and long-term—has now been posted. And it’s a doozy. According to SEC Chair Gary Gensler, to meet the SEC’s “mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation, the SEC has a lot of regulatory work ahead of us.” That’s certainly an understatement. While former SEC Chair Jay Clayton considered the short-term agenda to signify rulemakings that the SEC actually planned to pursue in the following 12 months, Gensler may be operating under a different clock. What stands out here are plans for disclosure on climate and human capital (including diversity), cybersecurity risk disclosure, Rule 10b5-1, universal proxy and SPACs. In addition, with a new sheriff in town, some of the SEC’s more recent controversial rulemakings of the last year or so may be revisited, such as Rule 14a-8. The agenda also identifies a few topics that are still just at the pre-rule stage—i.e., just a twinkle in someone’s eye—such as gamification (behavioral prompts, predictive analytics and differential marketing) and exempt offerings (updating the financial thresholds in the accredited investor definition and amendments to the integration framework). Notably, political spending disclosure is not expressly identified on the agenda, nor is there a reference to a comprehensive ESG disclosure framework (see this PubCo post). Below is a selection from the agenda.
On Friday, the SEC announced that it had “removed” William D. Duhnke III from the PCAOB and designated Duane M. DesParte to serve as Acting Chair, effective Friday. Duhnke has been serving as Chair since January 2018. The SEC also announced that it intends to seek candidates to fill all five board positions on the PCAOB. In the press release, SEC Chair Gary Gensler said that the “PCAOB has an opportunity to live up to Congress’s vision in the Sarbanes-Oxley Act….I look forward to working with my fellow commissioners, Acting Chair DesParte, and the staff of the PCAOB to set it on a path to better protect investors by ensuring that public company audits are informative, accurate, and independent.” What’s it all about?
In 2016 and early 2017, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as an enforcement action—to require issuers to be more transparent and more consistent in the use of non-GAAP financial measures and to avoid altogether non-GAAP measures that were misleading. In May 2016, the Corp Fin chief accountant, as reported in CFO.com, cautioned companies in neon lights that, with regard to non-GAAP financial measures, “[f]or lack of a better way to say it, we are going to crack down.” (See, e.g., this PubCo post and this PubCo post.) By early 2017, the SEC staff were apparently sufficiently satisfied (see this PubCo post) with the responses to their campaign that the pendulum swung back, and the relentless finger-wagging by the staff about non-GAAP financial measures appeared to have tailed off. (See this PubCo post.) And, according to this analysis from Audit Analytics, in 2018, SEC staff comments regarding non-GAAP financial measures actually began to decline. But, MarketWatch has reported, with the onset of COVID-19, there seems to have been something of a resurgence in the use of non-GAAP measures. Will we see another crackdown?
In February, then-Acting SEC Chair Allison Lee directed the staff of Corp Fin, in connection with the disclosure review process, to “enhance its focus on climate-related disclosure in public company filings,” starting with the extent to which public companies address the topics identified in the interpretive guidance the staff issued regarding climate change in 2010. (See this PubCo post.) In March, the SEC announced the creation of a new Climate and ESG Task Force in the Division of Enforcement. (See this PubCo post.) How else does this new ESG focus play out? On Wednesday, Bloomberg reported, Lindsay McCord, Corp Fin Chief Accountant, in remarks to the Baruch College spring financial reporting conference, said that the SEC staff are also “scrutinizing how public companies account for climate-related risks and impacts to their business based on existing accounting rules.” So, in addition to refreshing their understandings of the 2010 guidance, companies will also need to take a hard look at the how environmental issues could affect their financials.
On Monday, the SEC announced settled charges against Under Armour, Inc., a manufacturer of sports apparel, for misleading investors by failing to disclose material information about its “revenue management practices.” According to the Order, Under Armour had established a reputation for consistent revenue growth that exceeded analysts’ consensus estimates. But when internal forecasts began to indicate that it would miss those estimates, the company sought to close the gap by accelerating—“pulling forward”—existing orders that had been scheduled by customers for future quarters. Although this practice continued for six quarters, the SEC charged, the company failed to disclose this pull-forward practice as a driver of its revenue growth nor did it disclose the “known uncertainty” that this practice created with regard to revenues in future quarters. It’s worth noting that the SEC’s charges related solely to disclosure failures; the Order expressly indicated that the SEC did “not make any findings that revenue from these sales was not recorded in accordance with [GAAP].” Under Armour agreed to pay $9 million to settle the action.
At the end of last week, the SEC announced that it had filed settled charges against eight companies for failing to disclose in their Form 12b-25 filings (Form NT Notification of Late Filing) that their late filings of periodic reports were caused by an anticipated restatement or correction of prior financial reporting. The staff detected the violations 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. According to Melissa Hodgman, the new (again) Acting Director of Enforcement (following the abrupt resignation of the prior Director), “[a]s today’s actions show, we will continue to use data analytics to uncover difficult to detect disclosure violations….Targeted initiatives like this allow us to efficiently address disclosure abuses that have the potential to undermine investor confidence in our markets if left unaddressed.” Is it just more “broken windows”? Maybe, maybe not. 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.
Reuters is reporting—exclusively—that the SEC is contemplating issuing more guidance that would “rein in growth projections” made by listed SPACs and clarify when the PSLRA would be available to protect SPAC projections, “according to three people with knowledge of the discussions.” According to Reuters, the SEC guidance “would escalate its crackdown on the deal frenzy” in SPACs and could exacerbate the slowdown that has already occurred in reaction to the SEC’s previous guidance on SPAC warrants. For 2021 so far, Reuters, citing data from Dealogic, reported the value of de-SPAC transactions at a record $263 billion; however, SPACs raised only $2.5 billion during the first 20 days of April compared to $17 billion raised during the first 20 days of January.
Warrants are frequently issued in connection with the formation and initial registered offerings of SPACs, but apparently there have been some problems with accounting for some of these warrants, or at least, so it appears from this Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) from Acting Corp Fin Director John Coates and Acting Chief Accountant Paul Munter. The Statement is intended to “highlight the potential accounting implications of certain terms that may be common in warrants included in SPAC transactions” and to discuss what needs to be done if this Statement leads a company and its auditors to determine there is an error in any previously filed financial statements. The primary issue identified in the Statement is whether these warrants should be classified as equity or liability, which depends largely on the specific terms of the warrant and the entity’s specific facts and circumstances. If warrants are classified as a liability, according to the Statement, they should be “measured at fair value, with changes in fair value reported each period in earnings.”
In December 2019, as part of its strategy of enhancing transparency and accessibility through proactive stakeholder engagement, the PCAOB launched an effort to engage with audit committees, conducting conversations with almost 400 audit committee chairs focused on audit committee perspectives on topics such as audit quality assessment and improvement and auditor communications. (See this PubCo post.) As noted by PCAOB Chair William Duhnke in this PCAOB webinar for audit committees, the PCAOB prioritized this engagement, viewing informed and engaged audit committees as “force multipliers.” The PCAOB continued this outreach to audit committee chairs during 2020, contacting the audit committee chairs of most of the U.S. public companies that had audits inspected by the PCAOB during 2020. The PCAOB spoke with almost 300 audit committee chairs and discussed the results in this new report. The discussions involved Covid-19, communications by the auditor with the audit committee, new auditing and accounting standards and emerging technologies. As part of their discussions with the PCAOB, the chairs identified a number of practices in connection with each topic that they viewed as particularly effective—advice that could be useful to other audit committees.
Remember the clawback provision of SOX 304? That provision provides a reimbursement remedy against CEOs and CFOs when the issuer has restated its financial statements as a result of misconduct. Although the provision was enacted in 2002, it wasn’t until 2007 that an executive was successfully hit with a clawback claim (and a big one it was—the executive returned approximately $600 million in cash and options). And since then, SOX 304 hasn’t gotten all that much of a workout. As reflected in this Order, the SEC has just brought settled charges against the former CEO and CFO of WageWorks Inc., alleging that they made false and misleading statements and omissions, including to the company’s outside audit firm, that led to improper revenue recognition and ultimately resulted in a financial restatement. The settlements with both former executives included reimbursement of incentive-based compensation under SOX 304.