SEC Ends Defense of Climate-Related Disclosure Rules

SEC Hot Topic, SEC News

Following a February 11, 2025, Statement announcing that Acting Chairman Uyeda had directed the SEC staff to request that the Eighth Circuit not schedule arguments for the consolidated litigation challenging the SEC’s climate-related disclosure rules, on March 27, 2025, the Commission formally voted to end its defense of the rules.

In the Press Release announcing the Commission action, Acting Chairman Uyeda said, “The goal of today’s Commission action and notification to the court is to cease the Commission’s involvement in the defense of the costly and unnecessarily intrusive climate change disclosure rules.”

Commissioner Crenshaw issued a Statement disagreeing with the Commission’s action.

As always, your thoughts and comments are welcome!

CorpFin Updates More C&DIs

SEC News

On March 20, 2025, CorpFin announced a number of C&DI updates.  Several of the updates address registration issues, including the timing of filing a registration statement after a year end has passed but the related Form 10-K or Form 10-K Part III information has not been filed.  All the C&DIs related to the now vacated daily share repurchase Form F-SR were withdrawn.

For foreign private issuers, new C&DI 110.10 states that an auditor change that has been reported on Form 6-K does not need to be reported in a subsequent Form 20-F so long as the Form 6-K includes all disclosures required by Form 20-F Item 16F(a).

As always, your thoughts and comments are welcome.

Acting Chair Uyeda Addresses the Role of the Commission

SEC News

On February 21, 2025, Acting Chair Mark T. Uyeda delivered the R. Franklin Balotti Keynote Address at the Florida Bar’s 41st Annual Federal Securities Institute and M&A Conference.  In his address Acting Chair Uyeda focused on “the Commission’s role in fostering innovation, job creation, and economic growth, by maintaining cost-effective regulations for every stage of a company’s lifecycle.”

The major sections of his address were:

    • A New Beginning,
    • Improving Capital-Raising Opportunities for Entrepreneurs,
    • Empowering Retail Investment in Private Companies,
    • Making IPO’s Attractive Again, and
    • Scaling Public Company Disclosure Requirements.

His remarks address a number of areas, including crowdfunding regulations, tailoring the Commission’s regulations for newly public companies and whether the Commissions scaled disclosure requirements, including the definitions of large accelerated and accelerated filer and smaller reporting company, should be updated.  He also raised the question of whether all smaller reporting companies should be exempt from the SOX 404 ICFR auditor attestation requirements.

As always, your thoughts and comments are welcome!

CorpFin Expands Confidential Review Process for Draft Registration Statements

SEC Hot Topic, SEC News

As a step to facilitate capital formation, on March 3, 2025, the SEC announced that the Division of Corporation Finance will expand its confidential review process for draft registration statements.  The confidential review process was established as part of the 2012 JOBS Act.  CorpFin expanded the process to all issuers in 2017.  According to the Announcement, this next group of changes includes:

    • “Expanding the availability of the nonpublic review process for the initial registration of a class of securities under the Exchange Act to include both Section 12(b) and Section 12(g) registration statements on Forms 10, 20-F, or 40-F.
    • Permitting issuers to submit draft registration statements regardless of how much time has passed since they became subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act.
    • Expanding the availability of the nonpublic review process for a de-SPAC transaction in situations where the SPAC is the surviving entity (i.e., SPAC-on-top structure) as long as the target is eligible to submit a draft registration statement.
    • Permitting issuers to omit the name of the underwriter(s) from their initial draft registration statement submissions, when otherwise required by Items 501 and 508 of Regulation S-K, provided that they include the name of the underwriter(s) in subsequent submissions and public filings.”

In the Press Release announcing these changes Cicely LaMothe, Acting Director of CorpFin said:

“Over the years, staff have observed companies seeking to raise capital are taking advantage of the nonpublic review process when available. Expanding these popular accommodations will provide new and existing companies greater flexibility to explore and plan public offerings.”

As always, your thoughts and comments are welcome!

A Proxy Reminder – Enforcement Focus on Perks Disclosure Continues!

Enforcement, SEC Hot Topic

As companies prepare for their next proxy statement, the SEC Enforcement Division has sent a reminder to focus carefully on perks disclosures.  In the latest of its on-going series of perks related enforcement actions, on December 17, 2024, Express, Inc. was charged with failure to disclose $979,269 worth of perks paid to its CEO.  (You can read about earlier cases in this blog post.)

A majority of the undisclosed perks were related to the CEO’s authorized personal use of chartered aircraft.  The company did not use the appropriate definition of perks when analyzing these costs, which resulted in the disclosure failure.

In the related Accounting and Auditing Enforcement Release, the SEC noted that its 2006 amendments to executive compensation disclosure requirements in S-K Item 402 clarify that:

 “An item is not a perquisite or personal benefit, if it is integrally and directly related to the performance of the executive’s duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

The 2006 amendments also state that the idea of a benefit that is “integrally and directly related” to job performance is intended to be very narrow and distinguishes between something provided because the executive needs it to do their job (thus making it integrally and directly related to the performance of duties), and something provided for some other reason, even where that other reason can involve “both company benefit and personal benefit.”

According to the SEC, Express “incorrectly applied a standard whereby a business purpose would be sufficient to determine that certain items were not perquisites or personal benefits that required disclosure.”  This is very similar to the issue in an earlier case involving Dow Chemical.

Express self-reported and cooperated extensively with the Enforcement Division.  Based on these actions the company was not fined but did enter into a cease-and-desist order.  Express was delisted from the NYSE in March 2024 and in April 2024 filed for bankruptcy and terminated its registration.

As always, your thoughts and comments are welcome.

SEC Updates Shareholder Proposal Guidance

SEC News

On February 12, 2025, the SEC issued Staff Legal Bulletin 14M, addressing several matters related to the shareholder proposal process.  Staff Legal Bulletin 14M rescinds SLB 14L and addresses the scope and application of certain parts of Rule 14a-8, including the economic relevance exclusion in Rule 14a-8(i)(5), the ordinary business exclusion in Rule 14a-8(i)(7), and issues of micromanagement.  It presents the SEC’s current views on several other issues, including proof of ownership letters and the use of email. It also includes a section of frequently asked questions.

As always, your thoughts and comments are welcome!

Commissioner Peirce Addresses Potential Regulatory Directions

SEC News

On January 27, 2025, SEC Commissioner Hester M. Peirce delivered the Alan B. Levenson Keynote Address at the Northwestern Securities Regulation Institute.  Continuing her practice of devising engaging titles for her speeches, these remarks are titled Sheep in the Steep.  She begins with a description of how the Sierra Nevada bighorn sheep “navigate the treacherous alpine terrains of their habitat.”  She then compares “the bighorn—making their way in a terrain that is steep, varied, and fraught with danger, including predators, avalanches, and disease” to “public companies navigating the hazardous regulatory, political, and societal landscape of today.”

Commissioner Peirce suggests seven steps to “offer a path toward more level, predictable terrain” for public companies.  Each of the seven steps, along with her thoughtful discussion behind each step, make for interesting reading.  Her step six is particularly relevant for professionals involved in public company reporting:

“A sixth step in bringing companies back to normal is for the Commission staff in our Division of Corporation Finance and Office of the Chief Accountant to re-double efforts to provide guidance to companies about the many disclosure issues that arise in the normal course of business. In the registration statement review process, staff should communicate early and often so new and seasoned issuers alike can have increased confidence in offering timelines. Of course, engagement on timing alone is not enough. The Commission also should encourage the expert staff to engage with public companies and their lawyers and accountants on difficult questions about the application of new and existing rules. This engagement should be dynamic and interactive, not formulaic. Commission staff time is well spent on these fundamental functions of a disclosure regulator, which in recent years have languished due to other Commission priorities.”

As always, your thoughts and comments are welcome!

Acting SEC Chairman Uyeda Statement on Climate-Related Disclosure Rules

SEC Hot Topic, SEC News

On February 11, 2025, Acting SEC Chairman Mark T. Uyeda issued a Statement announcing that he has directed the SEC staff to request that the Eighth Circuit not schedule arguments for the consolidated litigation challenging the SEC’s climate-related disclosure rules.  According to the Statement this will “provide time for the Commission to deliberate and determine the appropriate next steps in these cases.”

You can read more, including concerns about the lack of statutory authority for the Commission to promulgate these rules, in the Statement.

As always, your thoughts and comments are welcome!

Another Channel Stuffing Disclosure Enforcement

Enforcement, Hot Topic

On November 12, 2024, the SEC announced yet another enforcement action focused on using sales incentives and similar strategies to achieve revenue targets without appropriate disclosure to investors about the use and impact of such strategies.  This action focuses on Elanco Animal Health Inc. (Elanco), which was spun off by Eli Lilly and Company in 2018. (You can read about earlier cases in this blog post.)

As is typical of this kind of case, it began with a surprise stock drop.  According to the SEC’s  Order:

“On May 7, 2020, Elaco announced an expected $160 million decline in revenue for the first and second quarters of 2020 that caused its share price to drop by over 13%. The statement cited the uncertainty of the COVID-19 pandemic and a ‘strategic change’ in Elanco’s inventory management practices – including reductions in channel inventory – as the reason for the decline. Elanco publicly stated that it had not anticipated a strategic change to reduce channel inventory levels when it started the year.”

What the company did not disclose was that from the first quarter of 2019 to the first quarter of 2020 it had relied on incentives to generate sales to distributors to meet revenue targets.  Internally Elanco referred to these sales as the “Quarter-End Incentivized Sales” or “Incentivized Sales.”   Achieving revenue targets was particularly important for Elanco as a newly public company.  As is usually the case, this practice could not go on indefinitely because inventory channels had become overstocked.

When management knows there is a potential problem on the horizon (e.g., failing to meet sales growth expectations, as in this case), the known-trend MD&A requirements of S-K Item 303 require that companies disclose:

“Known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”

Again, from the SEC’s Order:

“From May 2019 through May 2020, Elanco’s public disclosures misled investors by attributing its revenue and revenue growth to strong consumer demand for its products while failing to disclose the material impact of its Quarter-End Incentivized Sales and the reasonably likely risk that such sales practices could have a negative impact on revenue in future quarters.

Elanco’s use of Quarter-End Incentivized Sales created an uncertainty or event that was known to Elanco’s senior management and reasonably expected to have a material effect on its future revenues.”

The SEC also included the failure of Elanco’s disclosure controls and procedures in the enforcement.

One important aspect of this case relates to revenue recognition accounting.  There was no issue with how and when Elanco recognized revenue.  No accounting issues were raised in the AAER.  This enforcement is all about disclosure.

Elanco entered into a Cease-and-Desist Order and paid a $15,000,000 civil money penalty.

As always, your thoughts and comments are welcome!